Indonesia Moves to End Finance Minister-to-Fuel Price Ambiguity

President Susilo Bambang Yudhoyono is poised to swear in a new finance chief as early as tomorrow while his government prepares to set higher subsidized-fuel prices, moving to end policy ambiguity that has hurt investor confidence and the currency.

Acting Finance Minister Hatta Rajasa said today that the inauguration of his replacement, whom he declined to identify, would take place this week. He also said he signed a revised state budget that will be presented to Parliament tomorrow. The government has said the new budget will contain details of a compensation plan to offset the impact of higher fuel prices on the poor.

“There’s been an overhang on the markets, on confidence, so I think further delays could have undermined the government’s credibility, and the president’s as well,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore, referring to the finance minister appointment and the fuel policy.

The Indonesian rupiah is worst performing currency in Asia after the yen in the past year as surging oil imports strained government finances and led to a record current-account shortfall. Delays in curbing fuel subsidies have already cost the country a positive outlook on its sovereign credit rating at Standard & Poor’s, and Yudhoyono has said he will only increase prices after Parliament approves compensation for the poor.

The government intends to raise subsidized gasoline prices to 6,500 rupiah ($0.67) a liter, and subsidized diesel to 5,500 rupiah per liter, Planning Minister Armida Alisjahbana told reporters today.

Yield Gap

The difference in yield between Indonesia’s two- and 10-year bonds narrowed to the least since February earlier today after the government spelled out its plans for fuel subsidies in recent weeks. The yield spread shrank 20 basis points this month to 95 in Jakarta, the least since Feb. 25, according to prices from the Inter Dealer Market Association.

Consumer prices rose 5.57 percent in April from a year earlier, slowing from a 22-month high of 5.9 percent in March. Bank Indonesia will release its monetary policy decision tomorrow, with all 21 economists surveyed by Bloomberg predicting the reference rate will be left at 5.75 percent.

Inflation may accelerate to as much as 8 percent after the government raises fuel prices, Chua said.

Without a reduction in fuel subsidies, the cost of maintaining the subsidies may rise to 297.7 trillion rupiah this year from the current target of 193.8 trillion rupiah, Yudhoyono has said. Indonesia spent 211.9 trillion rupiah on fuel subsidies last year, spurring demand for energy products that contributed to a record trade deficit in October.

Rating Outlook

Rajasa, who is also coordinating minister for the economy, took over the finance job last month from Agus Martowardojo, who is set to become the next Bank Indonesia chief. The appointment of Rajasa on April 19 rattled markets as stocks fell after the announcement.

S&P cut its rating outlook on Indonesia’s debt to stable from positive on May 2, saying a stalling of reform momentum and a weaker external profile have reduced the chance of an upgrade over the next 12 months. The company ranks Indonesia at its highest junk level, opting not to follow Fitch Ratings Ltd. and Moody’s Investors Service in restoring Southeast Asia’s largest economy to investment grade.

S&P said it may raise the country’s rating if the fuel reforms are finalized, the state budget is improved, or if structural reforms boost economic growth.

Indonesia’s economy grew at the slowest pace in more than two years last quarter as slower exports and government spending countered gains in consumption and investment.

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