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Indonesia May Adopt Single Price in Reducing Fuel Subsidies

Indonesia may raise fuel prices to the same level across all categories instead of revising them by vehicle type in its bid to curb subsidies, a presidential spokesman said.

The government is “leaning toward” a single price for subsidized fuel, Julian Aldrin Pasha told reporters today at the presidential palace. An alternative plan would require private car users to pay about 6,500 rupiah (67 U.S. cents) per liter, while the price for motorcycles and public transport vehicles would remain at 4,500 rupiah.

President Susilo Bambang Yudhoyono is seeking fuel-subsidy cuts to free up more funds for infrastructure and to spur expansion. The government limited the use of partially subsidized diesel in January after protests derailed plans to raise prices in 2012. Assistance must be reduced for those who can afford paying for fuel at full market price and maintained for those who can’t, Yudhoyono has said.

“The blanket increase is better in terms of implementation,” said Enrico Tanuwidjaja, a Singapore-based economist at Royal Bank of Scotland Group Plc. “Indonesia’s economy should be able to adjust to it and the central bank may raise its benchmark rate in third quarter.”

Indonesians are expecting a single subsidized fuel price and are ready for it, Minister of Energy and Mineral Resources Jero Wacik told reporters in Jakarta today.

Motorcycles, Public Transport

While there is “thought of responding” to this expectation, Yudhoyono still wants to protect motorcycle and public transportation users, Wacik said. The price for subsidized fuel wouldn’t be increased to 6,500 rupiah per liter, he said, adding the government is calculating the appropriate level.

Yudhoyono may announce the policy tomorrow, Armida Alisjahbana, state minister for national planning and development, told reporters today. The president said in March a new policy could be fleshed out within weeks.

Yudhoyono, who can’t run for president next year after serving two terms, struggled to win support from within his own coalition for last year’s proposed fuel-price increase. He has said that Indonesia should review its subsidy bill and use the savings to boost infrastructure, calling for fiscal prudence.

Standard & Poor’s said this month that a delay in structural reforms, especially rationalization of energy subsidies, is a constraint in Indonesia’s credit quality.

Subsidy Allocation

In his annual budget announced in August, the president allocated 274.7 trillion rupiah for energy subsidies, compared with 184.4 trillion rupiah for capital spending. The country spent 211.9 trillion rupiah on fuel subsidies in 2012.

Consumer price gains quickened to 5.9 percent last month from a year earlier and Bank Indonesia has held borrowing costs for 14 meetings. While gross domestic product has risen above 6 percent for the past nine quarters, the economy expanded in the three months through December at the slowest pace in more than two years as exports fell amid a decline in commodity prices.

“From a market perspective, I think you could see a knee jerk initial negative reaction as a higher inflation premium is priced in,” said Prakriti Sofat, a regional economist at Barclays Plc. in Singapore, referring to the single-price option. “After that, as the market absorbs that this is good for the fiscal situation, it’s good for the current account, I think it will ultimately be positive for markets as well.”

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