Jakarta Calm After Subsidized Fuel Prices Are Increased

The streets of Indonesia’s capital Jakarta were quiet today after the government raised fuel prices for the first time since 2008, compared with earlier this week when protests erupted across the country.

The price of subsidized gasoline was increased by 44 percent to 6,500 rupiah ($0.65) a liter, while diesel is 22 percent higher at 5,500 rupiah a liter, Energy and Mineral Resources Minister Jero Wacik said June 21 in a press briefing in Jakarta. The changes are effective today.

President Susilo Bambang Yudhoyono’s administration raised prices to cut subsidy costs and boost confidence in the rupiah, in a country where riots spurred by soaring living costs helped oust dictator Suharto in 1998. Curbing energy subsidies could reduce demand for oil imports, which have led to trade and current-account deficits and contributed to the rupiah being one of the worst performing currencies in Asia in the past year.

“We need to take steps to boost our economy,” Coordinating Minister for the Economy Hatta Rajasa said at the briefing. “In line with the revised state budget, the government is taking the step of adjusting fuel prices, realizing that this will affect inflation and people’s purchasing power.”

Some Jakarta residents were thinking about how to save money in other areas to compensate for higher fuel prices.

Supraman, 32, the owner and deliveryman of a bakery in Hayam Wuruk, western Jakarta, uses a motorbike to deliver bread filled with chocolate, coconut, cheese and minced meat made by his wife that cost 12,000 rupiah each to a few restaurants in the area. He said delivery makes up about 20% of his cost but he doesn’t charge a service fee to his customers.

‘More Expensive’

“What will happen is everything will get more expensive,” Supraman, who uses one name, said in an interview. “Food, clothes, everything gets somewhere using fuel so the prices of everything will definitely rise. We aren’t increasing our prices yet because we don’t want to shock our customers.”

Supraman said he and his wife are thinking about ways maintain a profit without increasing prices.

“We have to do what we can to live,” he said. We will probably find a way to cut costs somewhere; I don’t want to raise prices so suddenly. Maybe we will reduce the filling a little or make the bread a little smaller, I don’t know. We have to think about it.’’

Consumer prices rose 5.47 percent in May, with the pace of gains slowing for a second month. The government predicts inflation will quicken to 7.2 percent this year from an initial estimate of 4.9 percent as a result of higher fuel prices.

Trade Balance

The fuel-price increase will strengthen the nation’s currency and the trade balance as petroleum imports fall, while removing the incentive for smugglers to sell subsidized fuel abroad, Finance Minister Chatib Basri said in an interview June 19. Indonesia, an energy producer, is a net importer of oil and until December 2008 was Asia’s only member of the Organization of Petroleum Exporting Countries.

Subsidized gasoline and diesel were previously set at 4,500 rupiah a liter. The world’s fourth-most populous nation last increased fuel prices on May 24, 2008. Indonesia also raised prices twice in 2005, according to Basri.

The rupiah declined for a sixth week as of yesterday, losing 0.6 percent to 9,930 per dollar, prices from local banks compiled by Bloomberg show. It traded at a 4 percent premium to one-month non-deliverable forwards, which slid 2.8 percent to 10,345, data compiled by Bloomberg show.

Indonesian policy makers have struggled to contain the rupiah’s decline, with the country’s currency reserves dropping as the central bank sold dollars.

Rating Outlook

Yudhoyono had put off raising fuel prices since protests derailed a planned increase last year. There were demonstrations this week as lawmakers voted in favor of a compensation program that the president made a precondition for raising fuel prices.

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

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. Policy makers allocated 27.9 trillion rupiah in compensation in the revised 2013 budget approved by Parliament June 17.

“The retail fuel price hike definitely represents a step in the right direction from a reform perspective,” Deyi Tan, a Singapore-based economist at Morgan Stanley, wrote in a June 18 report after Parliament approved the revised budget. “However, it will come with the short-term pain of higher inflation and higher policy rates.”

The government is in an early stage of studying a new fuel subsidy system, Minister Basri said yesterday. Among the options being considered is to peg the subsidies at a certain amount above which fuel prices will follow an index, he said, without elaborating. Another option would be to make monthly price adjustments, he said.

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