Indonesia plans fuel price increase

Indonesia plans fuel price increase

By John Aglionby in Jakarta

Published: April 30 2008 17:07 | Last updated: April 30 2008 17:07

Indonesia is set to raise subsidised fuel prices in June for the first time since 2005 and introduce petrol rationing to overcome a ballooning subsidies bill and declining market confidence, the country’s finance minister said on Wednesday.

Sri Mulyani Indrawati told the Financial Times that if present trends continued the government expected to raise government-set prices by about 30 per cent and introduce a smart card system to limit fuel purchases to 60 litres per month per vehicle.

The government’s finances are suffering significantly as a result of soaring global oil prices. Energy subsidies have ballooned from Rp88,000bn ($9.6bn, €6bn, £4.7bn), or 11.7 per cent of the state budget, in 2007 to Rp187,000bn, or 18.9 per cent of the budget, this year.

The latter figure assumes an average international oil price of $100 per barrel. On Wednesday Nymex crude was trading at $115 per barrel.

Yields on government bonds have risen 270 basis points to 12.8 per cent since March, a reflection of market concerns over the security of the budget and inflation fears. The Indonesian stock exchange composite index has also fallen more than 6 per cent in the past month.

With legislative elections less than a year away and presidential polls expected in July next year the government will not be able politically to repeat the 126 per cent fuel price rise of October 2005, which was the last increase.

But Nick Cashmore, of CLSA in Jakarta, said that investors had told the government they “expect a resolution of the subsidy issue before they finance another billion dollar [sovereign] bond”.

The government still needs to raise several billion dollars this year to finance the budget and meet its target of a 2.1 per cent budget deficit.

More than 90 per cent of the fuel used by Indonesian vehicles is subsidised. The World Bank estimates that 80 per cent of the subsidy is enjoyed by the richest 40 per cent of the population.

Ms Sri Mulyani said the cabinet would decide the size and timing of any fuel price rise “soon” but that the government was receptive to a recommendation from the Indonesian chamber of commerce that society could not handle more than a 30 per cent rise.

The government is keen to increase massively infrastructure spending this year to stimulate growth and reduce poverty.

The minister predicted that the government would save about Rp25,000bn with a 30 per cent price rise and rationing, of which about 45 per cent would be spent on direct cash transfers to 19.1m poorer families.

On timing, she said that if oil prices continued their current trend it would be necessary to raise subsidised fuel prices “sooner rather than later”.

Rizal Prasetio, of JPMorgan, believed a 30 per cent rise would be well received by the markets but the government would have to work hard to prevent protests.