Indonesia will raise subsidized fuel prices only after the state budget is revised to account for compensation programs for the poor, probably in May, President Susilo Bambang Yudhoyono said.
While the government must cut subsidies by increasing prices, it should be done gradually, and programs such as cash transfers, rice distribution and education scholarships must first be set during budget revision talks with the parliament, Yudhoyono told regional governors and mayors a national development planning meeting today in Jakarta. Those talks will probably be completed next month, he said.
“When will the fuel price be raised?” Yudhoyono said. “When the compensation fund is ready, meaning that once the social aide is ready we will channel it. There must not be any gap in time. If the parliament approves, God willing in May, that means the compensation fund and social aide are ready. And if that’s ready, then of course the increase in fuel price in a certain amount will be applied.”
Yudhoyono is seeking fuel-subsidy cuts to free up funds for infrastructure and spur growth, after limiting the use of partially government-funded diesel in January. Since protests derailed plans to raise prices in 2012, officials have explored a variety of options to revamp budget spending in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998.
“The president is trying to balance the need to adjust fuel prices versus potential political implications for his party in the upcoming elections,” said Prakriti Sofat, a Singapore-based regional economist at Barclays Plc. “By making the fuel price hike conditional on the compensation package, he has thrown the ball into the parliament’s court.”
Government bonds fell after the announcement, pushing the yield on the 5.625 percent notes due May 2023 to rise one basis point, or 0.01 percentage point, to 5.49 percent as of 3:12 p.m. in Jakarta, the highest since April 11, according to prices from the Inter Dealer Market Association.
The rupiah is set to decline for a second month, weakening 0.1 percent in April and steady today at 9,722 per dollar, prices from local banks compiled by Bloomberg show. The Jakarta Composite index dropped 0.4 percent before gaining 0.7 percent at the close of trading.
“Continued uncertainty on fuel prices will potentially weigh on the market - so we believe clarity on the issue is important,” Sofat said.
Yudhoyono said in March the subsidy plan may be fleshed out in one to two weeks.
Without a reduction in fuel subsidies, their cost may rise to 297.7 trillion rupiah ($30.6 billion) from the current budget assumption of 193.8 trillion rupiah, and the deficit may rise to 3.83 percent of gross domestic product from 1.65 percent, the president said.
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.
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.