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Economics: Indonesia
Economics – Markets – Strategy
The government
will struggle with
its deficit; oil
rationing programs
will not be
effective
In short, unless oil prices ease
at least 10% in the near term
and hold at those levels, and/
or the rupiah appreciates, the
government is only just keeping
its head above water where
its fiscal thresholds are
concerned. To a degree, plans
to ration fuel consumption
via the use of smart cards will
help ease the total subsidy
burden. But this program will
be rolled out only from
September, and will reportedly
only be introduced in Jakarta
and surrounding areas in Java.
It remains to be seen how
effective this system will be
at curbing consumption, and
Chart 3: Deficit/subsidy to GDP
% of GDP
4
3
2
1
0
2003 2004 2005 2006 2007
Oil sub % of GDP
Subsidized
fuel prices
lifted
126%
Budget balance % of GDP
even smuggling activity – the larger the subsidy on a good, the larger the distortion
on consumption behaviour. Indeed, even after fuel prices were hiked a senior
energy ministry said that consumption of subsidized gasoline is likely to rise by
over 5% this year, to 20.4mn kilolitres. Next year, subsidized diesel oil consumption
is expected to increase by 6%, to 12.6mn kl from an estimated 11.9mn kl this
year.
Table 2: Subsidy scenarios after May fuel price hike (sub % of GDP)
2008 USD/IDR
Nymex 1mth 9100 9200 9300 9400 9500
95 2.5 2.5 2.6 2.6 2.7
100 2.7 2.7 2.8 2.8 2.9
105 2.9 2.9 3.0 3.0 3.1
110 3.1 3.1 3.2 3.2 3.3
115 3.3 3.4 3.4 3.5 3.5
120 3.5 3.6 3.6 3.7 3.7
125 3.7 3.8 3.8 3.9 3.9
130 3.9 4.0 4.0 4.1 4.1
135 4.1 4.2 4.2 4.3 4.3
Further hikes in
subsidized fuel
prices cannot be
ruled out
Ultimately, nothing will alleviate the strain on Indonesia’s deficit – or curb the
consumption of subsidized fuel - as quickly or directly as cutting subsidies. And
this might just be the path Indonesia will continue to take. To its credit, since
implementing the fuel price hike in May, the government has repeatedly emphasized
that it could not rule out further increases in fuel prices ahead of next year’s
Presidential elections.
How much will fuel prices have to be further lifted by? As it stands, even after
the May hike, domestic prices are still significantly below global market prices.
For example, subsidized premium fuel now sells for IDR 6,000/ltr; if we make
the conventional assumption that crude oil accounts for half the pump price,
then theoretically premium fuel should be retailing at above IDR 13,000! Needless
to say the government would never consider scrapping fuel prices all at one go,
particularly not when the elections are less than a year away. But our simulations
suggest that the government may have some really tough decisions to make in
the months ahead if things turn ugly - if we assume a crude oil average of USD
102