Indonesia Studying New Fuel to Curb Subsidy, Martowardojo Says

Indonesia may introduce a new type of fuel that can be sold at a higher price than existing subsidized products as the government seeks to reduce its energy budget without exacerbating inflation.

The country is considering having state-owned Pertamina sell a new fuel as part of plans to limit energy subsidies to private-owned vehicles, Finance Minister Agus Martowardojo told reporters in parliament today. A revised fuel policy may be announced in two weeks, Energy Minister Jero Wacik said.

“Indonesia needs more concrete steps to reduce the fuel subsidy,” Martowardojo said after winning parliament’s endorsement to become the next central bank governor. “If we fail to reduce the fuel subsidy, to guard Indonesia’s fiscal budget the government is ready to cut goods and capital spending and if needed, we’ll adjust the fuel price as the last choice.”

The availability of gasoline and diesel below international market rates has spurred oil imports in Indonesia, contributing to a record trade deficit in October and the worst-performing Asian currency after the yen and Indian rupee 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.

Budget Impact

A 2012 plan to ban some private vehicles from using subsidized fuel wasn’t implemented, Martowardojo said. An alternative fuel type priced below the current non-subsidized gasoline products needs to come with other policies in one package, he said. Pertamina sells subsidized fuel at 4,500 rupiah ($0.46) a liter.

President Susilo Bambang Yudhoyono’s government allocated about 300 trillion rupiah for fuel and electricity subsidies in the 2013 state budget, which is “too much,” Martowardojo said. Failure to implement concrete measures on the fuel policy will affect the state budget in the second half of this year, he said.

Indonesia’s fuel and electricity subsidies totaled 306.5 trillion rupiah in 2012 and the government earlier this year estimated 274.7 trillion rupiah for 2013.

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 in March. The bigger-than-target shortfall estimate is due to high subsidy costs, lower tax revenues and declining exports, he said. Fuel subsidies rose to 211.9 trillion rupiah last year as the country imported about $29 billion of oil products, based on official data.

Bonds Rise

The yield on Indonesia’s two-year bonds fell by the most this year today on speculation investors are favoring shorter-dated notes after inflation accelerated to a 22-month high last month. The rupiah was little changed at 9,742 a dollar as of 2:21 p.m. in Jakarta.

Consumer prices rose 5.9 percent in March from a year earlier, driven by higher foodstuff costs, official data showed yesterday. The central bank has a 3.5 percent-to-5.5 percent target range.

The inflation level is a concern, said Martowardojo, who will replace Darmin Nasution as Bank Indonesia governor when the latter’s term ends May 23. Indonesia needs a mix of fiscal, monetary and real-economy policies to curb inflation and monetary policy alone isn’t enough to contain prices, Martowardojo said.

Yudhoyono’s office signaled last month the government will avoid an immediate increase in fuel prices, as the scope for such moves narrows 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 government may impose a limit on the sale of subsidized fuel for privately-owned vehicles in “five big cities,” the finance minister said on March 14, without naming them.

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. The restrictions limit the use of subsidized diesel by forestry companies, commercial vessels and government vehicles in several provinces.

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