Foreign Reserve Drop Imperils Indonesia Subsidy: Southeast Asia

Indonesian foreign-exchange reserves will probably plunge the most since at least the Asian financial crisis this quarter, putting pressure on President Susilo Bambang Yudhoyono to cut fuel subsidies and curb imports.

The country’s reserves may fall by at least $2 billion in March, according to economists at Barclays Plc, PT Bank Danamon Indonesia and PT Bank Central Asia. The $7.6 billion drop in the first two months of 2013 was the largest since 1998, when Bloomberg began compiling the data. Yudhoyono has said changes to the fuel subsidy policy may be worked out within days.

The government has struggled to curb demand for oil imports, which contributed to a record trade deficit in October and the worst-performing currency in Asia excluding the yen in the past 12 months. Even with one of the region’s fastest growth rates boosting incomes, policy makers have refrained from raising fuel prices in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998.

“If there’s no reform on fuel subsidies, the higher oil imports will impact the forex reserve and increase the need to intervene to stabilize the rupiah,” said Anton Gunawan, chief economist at Bank Danamon in Jakarta. “Investors are worried about issues such as the current-account deficit and the subsidy problem -- they’re triggering capital outflows.”

The rupiah weakened 0.4 percent against the dollar last week, its third weekly decline and the longest losing streak since November, as global funds sold the nation’s assets on concern inflation will accelerate and the fiscal deficit will widen. The currency has fallen 5.6 percent in the past 12 months. Exports fell for a 10th straight month in January.

Pressure Sources

Indonesia limited the use of partially government-funded diesel in January, after protests in the world’s fourth-most populous nation derailed plans to raise prices in 2012. Fuel subsidies rose to 211.9 trillion rupiah ($22 billion) last year as the country imported about $29 billion of oil products, based on official data.

The continuing burden of energy subsidies are among emerging sources of pressure on Indonesia’s economic outlook, with fuel-subsidy reform being one of the appropriate policy responses, according to the World Bank.

If foreign-exchange reserves were to continue to fall at the same pace as over the last two months, “it would raise concerns among investors,” said Prakriti Sofat, a Singapore-based economist at Barclays. “The key question is what plan they have, whether the infrastructure for implementation exists, and the risks of leakage.”

Yudhoyono’s scope to raise prices is narrowing ahead of elections in 2014. The government is formulating a more targeted fuel-subsidy policy because the current one benefits middle to upper-income groups more than the poor, he said on March 13. The plan may be fleshed out in one to two weeks, he said.

Limited Use

Restrictions announced in January limit the use of subsidized diesel by forestry companies, commercial vessels and government vehicles in several provinces.

“I can assure there won’t be an increase in subsidized fuel prices in April,” Julian Aldrin Pasha, spokesman to the president, told reporters in Jakarta on March 19.

Yudhoyono, who can’t run for president next year after serving two terms, struggled to win support from within his own coalition for higher prices proposed last year. Indonesia missed its opportunity to cut subsidies in 2012, and the chance of a subsidized-fuel price increase this year is “fairly slim” because of the political context, Moody’s Investors Service analyst Christian de Guzman said in Jakarta on Jan. 31.

Instead, the government may impose a limit on the sale of subsidized fuel for privately-owned vehicles in “five big cities,” Finance Minister Agus Martowardojo said on March 14, without naming them. “Controlling the use of subsidized fuel will be a priority,” he said, adding that raising prices will be the last resort.

Exceeding Target

The Jakarta Composite Index fell 2 percent last week. The 2023 bonds fell, pushing the yield to the highest since November, as investors favored short-dated notes on concern a push to reduce subsidies will spur inflation. The 2014 bonds were little changed for the week.

Consumer prices will probably gain 5.13 percent this year, compared with 4.28 percent last year, according to the median estimate in a Bloomberg survey.

The budget deficit this year may be more than 2 percent of gross domestic product, exceeding the government’s target of 1.65 percent, Martowardojo said on March 19. The bigger-than-target shortfall estimate is due to high subsidy costs, lower tax revenues and declining exports, said Martowardojo, whose nomination by Yudhoyono for the role of central bank governor will be assessed by a parliamentary committee today.

Many Loopholes

“So far, the limitation of usage of subsidized fuel is not going well,” said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta. “There are so many loopholes in the implementation and it has benefited the middle-income class, which has the ability to use non-subsidized fuel.”

The government understands its subsidies are benefiting people who don’t really need them rather than the poor, and is “discussing very seriously” how to address the issue, Chairul Tanjung, Chairman of Indonesia’s National Economic Committee, said in a Bloomberg Television interview last week with Susan Li.

The issue highlights the political minefields in a region where governments are trying to curb subsidies while containing living costs. India partially freed diesel prices from state control in January, while Malaysia’s government, facing elections by late June, hasn’t announced further changes to its retail fuel policy since reducing subsidies for 95-RON gasoline, diesel and liquefied petroleum gas in 2010, when it also stopped paying to keep prices of the highest grade 97-RON gasoline low.

Social Order

Indonesia’s proposed policy will affect vehicle purchases, as consumers may need to allocate more money for fuel, said I Dewa Made Susila, finance director at PT Adira Dinamika Multi Finance, an auto financing unit of Bank Danamon. Indonesia’s domestic car sales rose to 103,284 units in February from 96,705 units in January, according to data compiled by Bloomberg.

“Putting in a mechanism to supervise the quotas is costly and may not be timely enough,” Helmi Arman, a Jakarta-based economist at Citigroup Inc., wrote in a note on March 14. “Implications to social order must also be watched if subsidized fuel becomes scarce even for the eligible parties.”

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