Indonesia’s fuel-price increase this month will strengthen the rupiah and the trade balance as oil imports fall, while removing the incentive for smugglers to sell subsidized products abroad, Finance Minister Chatib Basri said.
The nation will meet its budget assumption of the rupiah averaging 9,600 per dollar this year, Basri said in an interview at the Finance Ministry yesterday. The currency will have to be about 4.6 percent stronger than the current level on average for the rest of the year to meet the estimate.
“Once we adjust the fuel price, there will be a significant amount of import decline, especially from oil,” Basri, 47, said as he defended the need to push through a planned increase that has sparked protests. “Once we improve the trade balance, then the rupiah will be strengthening.”
Basri, who became finance chief last month, will oversee Indonesia’s first price increase for subsidized fuel in five years as President Susilo Bambang Yudhoyono grapples with one of Asia’s worst-performing currencies near the end of his second term. The government estimates that energy subsidies would have ballooned to $30 billion this year if left unchanged, eating up funds that could instead be spent on benefits for the poor or infrastructure projects.
While Indonesia’s currency forwards plunged today to the biggest discount to the spot rate in 21 months after Chairman Ben S. Bernanke said the U.S. Federal Reserve is prepared to begin phasing out its stimulus program, the rupiah’s decline today has been among the smallest in Asia.
“Offshore prices are affected by sentiment from comments from the Fed that they plan to reduce bond-buying,” said Suriyanto Chang, head of treasury at PT Bank QNB Kesawan in Jakarta. “Just as Basri said, past experience shows that after raising fuel prices, the rupiah’s reaction is significantly positive, so we expect the same to happen.”
The rupiah has averaged 9,723 per dollar so far in 2013 and closed at 9,908 yesterday. The currency would need to trade at an average of around 9,477 for the rest of the year to meet the government’s budget estimate of 9,600.
The nation last increased fuel prices on May 24, 2008, after which the rupiah gained 3 percent over the next 10 weeks. Indonesia also raised prices twice in 2005, Basri said.
The fuel-price increase “is just a matter of administrative work” and will happen by the end of this month, said Basri, appointed by Yudhoyono to a reshuffled team of top policy makers in Southeast Asia’s biggest economy.
The government may announce an increase in subsidized fuel prices tomorrow night and will make the new prices effective immediately, Industry Minister Mohamad S. Hidayat said today.
The administration intends to raise subsidized gasoline prices to 6,500 rupiah ($0.65) a liter and subsidized diesel to 5,500 rupiah, both from 4,500 rupiah, Basri said. That compares with 9,800 rupiah a liter outside Indonesia, Basri said.
“The relatively high price disparity induced people to do smuggling and because of that, the consumption kept rising,” burdening the trade balance, Basri said.
To mitigate the effect of higher fuel prices, more support will be provided for the poor, including rice subsidies and access to scholarships, the finance minister said. The government allocated 27.9 trillion rupiah in compensation in the revised 2013 budget approved by Parliament June 17.
Yudhoyono had set a compensation program for the poor as a precondition for adjusting fuel costs. He put off raising fuel prices after protests derailed a planned increase last year in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998. Protests have erupted across the country in the past week.
With the revised 2013 budget, the fiscal deficit will be 2.38 percent of gross domestic product, “which is quite healthy,” Basri said. Without a reduction in fuel subsidies, the shortfall could have reached 3.8 percent of GDP, he said.
Lawmakers also agreed to the government’s revised budget assumption for economic growth of 6.3 percent this year from the 6.8 percent targeted previously. Inflation is forecast at 7.2 percent, spurred by higher fuel prices, compared with a previous estimate of 4.9 percent.
Fuel subsidies would have risen to about 297 trillion rupiah this year without a price increase, instead of the current target of 200 trillion rupiah under the revised 2013 budget, Basri said June 18.
Indonesia recorded a trade deficit of $1.6 billion in April. The gap could reach as much as $3 billion this year without a fuel-price increase, Trade Minister Gita Wirjawan said on June 4.
Yudhoyono has asked Basri to ensure prudent fiscal policy. Basri, who is also chairman of the Investment Coordinating Board, succeeded Agus Martowardojo, who moved to head the central bank. Basri was special adviser to former Finance Minister Sri Mulyani Indrawati from 2006 to 2010, his profile on the investment board’s website shows.
Bank Indonesia unexpectedly raised its key interest rate for the first time since 2011 last week to support the currency and cool inflation expectations. The reference rate was increased by a quarter of a percentage point to 6 percent. All 19 economists surveyed by Bloomberg News expected no change. The central bank also raised its deposit facility rate, or Fasbi, by a quarter of a percentage point to 4.25 percent.
Inflation may peak in the June-August period because of higher subsidized fuel prices, Martowardojo said today. The central bank will respond to inflation with a macro-prudential policy mix, which may include interest-rate moves, he said.
The policy tightening and the fuel-price increase “are probably what is required to cool the economy and return it to a rate of growth more in line with what fundamentals would say is feasible,” Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch Ratings, said in an interview in Singapore yesterday.
Raising fuel prices could improve investor confidence in Indonesia’s economy, after a record current-account shortfall in 2012 helped make the rupiah the worst performer after the Japanese yen and Indian rupee in the past year among 11 Asian currencies tracked by Bloomberg.
“It is very important to give a signal to investors, especially in the financial markets, that they don’t need to have a worry about the fuel-price adjustment because the government will do it anyway,” said Basri, who has a doctorate in economics and a masters in economic development from Australian National University, according to his website.