Jakarta raises subsidised petrol price by 30%

Move seen as positive sign of new govt's resolve to reform economy
By Wahyudi Soeriaatmadja, Indonesia Correspondent, In Jakarta, The Straits Times, 18 Nov 2014

INDONESIA raised the price of subsidised petrol by nearly 31 per cent last night, in a much-anticipated move welcomed by economists and others as a signal of the new government's commitment to reforming South-east Asia's largest economy.

The pump price of one litre of lowest-grade premium fuel went up from 6,500 rupiah (70 Singapore cents) to 8,500 rupiah at midnight. Diesel now costs 7,500 rupiah a litre, up from 5,500 rupiah.

Talk that a hike was imminent saw long queues of motorists at petrol stations across the country, as well as demonstrations against the hike.

Fuel subsidies are tipped to cost the government some 250 trillion rupiah this year. They will rise to 290 trillion rupiah next year unless they are cut.

"All this time, we needed funds to spend on infrastructure, education, health. The funds were not there because we wasted them on fuel subsidies," President Joko Widodo told a press conference last night. "This fuel price hike will hopefully open doors to development spending."

The cost of building 10,000km of railway tracks is about US$20 billion (S$26 billion), or less than the annual spending on fuel subsidies. Indonesia currently has a 5,500km railway network which serves only Java and Sumatra.

Mr Wahyu Trenggono, director at the Indonesia Bond Pricing Agency, told The Straits Times: "In the short term, corporations will face higher costs and see a drop in profitability, but in the medium term, it will be good for the economy, and good for all."

Protests against the price hike have been taking place in recent weeks, and they are expected to mount in the coming days.

Yesterday, several hundred undergraduates blocked a toll road in Bogor and dozens of workers protested in Tangerang, both on the outskirts of Jakarta.

The Straits Times understands that details of the price hike, and the political fallout, were discussed at a closed-door Cabinet meeting yesterday afternoon.

The decision to go ahead came after President Joko, who took office on Oct 20, said on several occasions - including at the recent Asia-Pacific Economic Cooperation meetings in Beijing - that he would cut the hefty subsidies, which account for one-fifth of government spending which he described as "daily burning of cash".

Fuel subsidies have been around for decades as a means of providing a cushion against inflation for the poorest Indonesians. But in recent years the subsidies were enjoyed by the country's growing middle class instead.

Talk of an imminent subsidy cut has already seen food prices rise slightly, and to cushion the impact of the fuel price hike on the poor, Mr Joko launched health and education assistance cards earlier this month.

These will eventually help as many as 90 million residents and 24 million less-well-off students benefit from free health care and assistance for school necessities such as books and uniforms, and ease the burden of inflation from rising fuel prices.

Mr Joko had also instructed governors of 34 provinces to understand what was at stake and to explain to their officials and people that the subsidy was excessive, had trade-offs, and was affecting the national coffers.

Finance Minister Bambang Brodjonegoro had said that even with the declining global crude oil prices, currently at US$80 a barrel, the pump prices of Indonesia's subsidised RON 88 fuel were still much lower.

Dr Brodjonegoro said that each 1,000 rupiah increase in the subsidised fuel price would add an additional 1.2 per cent to inflation.

OCBC economist Wellian Wiranto wrote in a recent research note: "Fuel price has to be adjusted before it (the government) can really get the other stuff on the economic agenda done. This brings inflationary risk, sure, but one that the market can stomach."

Subsidised fuel prices in the region

- Most Indonesians buy the subsidised RON88-grade petrol, which has less octane than what is available in most countries.

A litre costs 8,500 rupiah (93 Singapore cents) as of Monday midnight, up from 6,500 rupiah.

The new price is about 70 per cent of the unsubsidised RON95 petrol, which costs 11,800 rupiah per litre.

- In Malaysia, Thailand and Vietnam, where fuel prices are also subsidised, a litre of the widely used RON95 petrol costs RM2.30 (89 Singapore cents), 31.88 baht (S$1.26) and 21,990 dong (S$1.32) respectively.

- Indonesia spent an estimated 250 trillion rupiah on fuel subsidies this year. That figure is likely to increase to 290 trillion rupiah next year.

- The Jokowi administration hopes to save an estimated 193 trillion rupiah after reducing subsidies on fuel. The saved amount could be used to construct as many as 5,500 state hospitals, 48,000 schools or 39,000 train cars.

Largely muted response to Jakarta's fuel price hike
By Zubaidah Nazeer Indonesia Correspondent In Jakarta, The Straits Times, 19 Nov 2014

SPORADIC protests broke out in some major Indonesian cities following a hefty hike in fuel prices, but the much anticipated move by the government of President Joko Widodo otherwise received a muted public response and was cheered by financial markets.

Hours after subsidised fuel prices went up at midnight yesterday, Mr Hidayat, a motorcycle taxi driver, was charging between 1,000 rupiah (10 Singapore cents) and 3,000 rupiah more for his service. None of the eight customers he had transported before lunch complained about the fare increase.

"My customers understand why I need to raise prices. Some of them even asked if this was enough for me," said the 43-year-old.

The fuel price hike of 2,000 rupiah a litre, from 6,500 rupiah to 8,500 rupiah, was announced by Mr Joko on Monday night in his first major policy move within a month in office.

In Makassar, Sulawesi, students threw Molotov cocktails but police sprayed water cannon to disperse them. Soldiers were also roped in.

In central Jakarta, a group of 50 men who burned tyres hours before the prices took effect disbanded after they were unable to raid a petrol station.

"Conditions remain stable and safe," police chief Sutarman told reporters yesterday, as his officers remained on alert, with men deployed to guard petrol stations in many places.

Economists who view the government's action as an indication of how serious it is about reforms welcomed the move.

Markets reacted favourably with the Jakarta Composite Index moving up by 1 per cent and the rupiah strengthening by 0.4 per cent against the US dollar.

Fuel subsidies cost Indonesia 211 trillion rupiah, or 2.3 per cent of the gross domestic product (GDP), last year, and are estimated to total 250 trillion rupiah this year, or about 2.5 per cent of the GDP. An even larger figure of 290 trillion rupiah from the 2015 budget was approved by Parliament to be set aside for next year.

Economists have said Indonesia needs to reduce or remove the subsidy, as it has been eating into the budget that could be allocated for development spending. Crucially, the subsidy is not benefiting the less well-off whom it was intended for, they said.

But political opponents took issue with the fact that prices were raised in spite of global crude prices sliding recently.

Golkar Party faction head Ade Komarudin said Mr Joko's move was illogical as global oil price is now 30 per cent less than what was factored in the budget, and accused the President of breaking his promise of caring for the people.

Indonesia last raised fuel prices by 44 per cent from 4,500 rupiah to 6,500 rupiah a litre in June last year, but a weakening rupiah negated the benefits from that move, noted economist Chua Hak Bin from Bank of America Merrill Lynch.

During his 10-year term which ended last month, president Susilo Bambang Yudhoyono raised fuel prices four times. He was forced to back off in March 2012 when thousands rallied nationwide in protests.

The largely muted response to Mr Joko was credited to the high level of trust people have in him. He had sweetened the ground sufficiently by distributing welfare incentives, such as education and health-care smartcards, to the poor before making the move.

He had also communicated to the people why the hike was necessary and inevitable.

Ordinary Indonesians are now concerned about inflation as operators will raise prices of basic items like food.

The Indonesia Organisation of Land Transport Owners, which includes the network of bus, minibus and minivan operators, is planning a nationwide strike today to show its concern about rising costs.

Meanwhile, neighbouring Malaysia yesterday surprisingly reduced the price for a high grade of fuel for vehicles, called RON97, by 20 sen a litre to RM2.55 (S$1), reversing a 15-sen hike made in September.

The other grade of fuel, RON95, stays at RM2.30 a litre.