Aug. 28 (Bloomberg) -- Indonesian President Susilo Bambang Yudhoyono rejected a request from his successor to reduce fuel subsidies, putting the burden on Joko Widodo to take a politically unpopular step central to his economic agenda.
Yudhoyono, who steps down in October after a decade in power, said it’s not a conducive time to raise prices, Widodo said in Jakarta today after a meeting between the two in Bali yesterday, according to a report on news website Tempo. Some $24.9 billion has been earmarked for fuel subsidies in the 2015 government budget, 14 percent of total spending.
Shrinking the fuel subsidy bill will give Widodo, known as Jokowi, more room to fund a policy program that includes improving infrastructure and access to health care and education. Southeast Asia’s largest economy is growing at the slowest pace since 2009.
“What a missed opportunity for SBY to rescue his legacy,” said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp., referring to Yudhoyono by his initials. “Given that the market in general had very little expectation that SBY would do the right thing and cut subsidies before he leaves, even as there’s always the hope for it, the reaction should be relatively muted.”
The rupiah fell 0.2 percent to 11,701 per dollar as of 6:55 p.m. in Jakarta, according to prices from local banks.
Reviewing the outgoing government’s 2015 budget is one of the first priorities for Jokowi before he takes over leadership of the world’s fourth-most populous country on Oct. 20.
Yudhoyono’s administration raised fuel prices in 2013, after delaying the move for a year because of parliamentary opposition and public protests. Protests after fuel price rises culminated in the ouster of former dictator Suharto in 1998. State energy company PT Pertamina restricted sales of the cheap fuel earlier this month, and then opened up the taps as long queues formed at pump stations.
Yudhoyono and Widodo agreed to have their officials hold further talks on the budget, they told reporters in Nusa Dua, Bali, yesterday.
“The issue of raising fuel is not about daring or not daring,” said Firmanzah, a spokesman for Yudhoyono. “The policy must be throughly prepared on how to address the impact, because it will affect economic growth and create a rising burden for the people.”
Jokowi, 53, said he wants as small a budget deficit as possible and that he is ready to implement unpopular policies, according to the report in Tempo, a media company.
Not every president would like to take the risk of dealing with fuel-subsidy reform, Vice Finance Minister Bambang Brodjonegoro said in an interview on Aug. 12. Yet failure to scale back the system and use part of the proceeds to invest in infrastructure would risk economic growth slumping below 5 percent in three to five years, he said.
Gross domestic product rose 5.12 percent in the second quarter from a year earlier. Yudhoyono’s proposed 2015 budget assumes GDP expansion of 5.6 percent, and Jokowi wants to target higher growth of 5.8 percent by cutting red tape and boosting investment, Arif Budimanta, a member of his economic team, said today.
Indonesia’s system of providing set gasoline prices leaves the country, a net oil importer, economically vulnerable. A sudden rise in prices, such as from tensions in the Middle East, widens the budget deficit, worsens the trade balance and can weaken the rupiah.
Jokowi “can revise the 2015 budget as early as the fourth quarter of 2014,” said Eric Alexander Sugandi, an economist at Standard Chartered Plc in Jakarta. The main concern is not about the timing of the increase but that Jokowi will have to deal with a fragmented parliament, he said.
A clause in the budget requiring parliamentary approval for a fuel price change has been deleted, meaning it’s up to the government, said Satya W Yudha, a member of parliament’s energy commission. A price rise is inevitable, he said.
“It’s the government’s domain since parliament has asked to raise it,” said Achmad Farial, deputy chairman at the commission.
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