Indonesia Approves Revised Budget, Fuel Compensation Plan

Indonesia’s parliament approved a revised 2013 budget including a compensation program for poor people, clearing the way for the government to raise fuel prices to reduce trade and current-account deficits.

The budget was passed during a plenary session in parliament in Jakarta late yesterday, with 338 members in favor and 181 against, said Speaker of the House Marzuki Alie. The government plans to lift the price of subsidized fuel this week after passing the compensation plan, Planning Minister Armida Alisjahbana told reporters in Jakarta before the vote. Protests erupted across the nation during and after the vote yesterday.

President Susilo Bambang Yudhoyono had put off raising fuel prices since protests derailed a planned increase last year, in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998. Yudhoyono made the compensation program a precondition to raising fuel prices, to reduce the potential public backlash.

“Raising the fuel price from the macro point of view is a step that has to be done for macro stability,” Finance Minister Chatib Basri told reporters at parliament.

Increasing fuel prices would improve investor confidence in Southeast Asia’s largest economy, after a record current-account shortfall in 2012 helped make the rupiah the worst performer after the Japanese yen among Asia’s 11 most-traded currencies in the past year.

Burning Tires

The move failed to lift the rupiah today, as most Asian currencies fell on speculation the Federal Reserve will taper stimulus that has spurred fund flows to emerging markets. The Indonesian currency dropped 0.5 percent to 9,934 per dollar as of 10:19 a.m. in Jakarta and touched 9,958 earlier, the weakest level since September 2009, according to prices from local banks compiled by Bloomberg. The rupiah’s one-month non-deliverable forwards declined 0.9 percent to 10,135 today after reaching 10,412 on June 11, the weakest since August 2009.

About 3,000 protesters staged a rally outside parliament during the vote yesterday, said Rikwanto, a Jakarta police spokesman who uses only one name. Students burned tires and braced against water cannons as the protests continued into the evening, according to footage from MetroTV.

Some protests across the archipelago were tainted by violence, with five protesters, six police and two journalists injured in rallies in Ternate, North Maluku and Jambi, the Jakarta Post reported, citing Agus Rianto, a police spokesman. Tear gas was used to disperse protesters in Jambi, according to the report.

Trade Deficit

Under the compensation program the government will provide 12 trillion rupiah ($1.2 billion) to 15.5 million households considered very poor, 7.5 trillion rupiah for a scholarship program and 729 billion rupiah for a family welfare program.

The government is proposing to increase the gasoline price to 6,500 rupiah a liter from 4,500 rupiah and the diesel price to 5,500 rupiah a liter from 4,500 rupiah, Finance Minister Basri said last month.

Indonesia recorded a trade deficit of $1.6 billion in April, official data show. The trade shortfall could reach $3 billion this year if the government fails to raise subsidized-fuel prices, Trade Minister Gita Wirjawan said on June 4.

Inflation Spike

Inflation, which was 5.47 percent in May, will quicken to 7.2 percent this year if the fuel prices are increased, the government estimates. Inflation may peak at about 8 percent within three months of a price increase, Chua Hak Bin of Bank of America Corp. estimated.

The upcoming week will be critical as authorities execute the fuel-price increase, DBS Group Holdings Ltd. said in a research note today. Inflation will spike close to 8 percent and about 0.3 percentage point will be shaved off economic growth, it said in the note.

Bank Indonesia made a surprise rate rise on June 13 to head off the risk of inflationary pressures. The yield on Indonesia’s 5.625 percent bonds due May 2023 rose two basis points, or 0.02 percentage point, to 6.5 percent today, data compiled by Bloomberg show.

Standard & Poor’s cut its rating outlook on Indonesia’s debt to stable from positive last month, saying a stalling of reform momentum and a weaker external profile had reduced the chance of an upgrade over the next 12 months. The company assigns Indonesia its highest junk rating.

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