Widodo Grips Political Hot Potato on Indonesia Fuel Aid: Economy

Indonesian presidential frontrunner Joko Widodo built his political career on a reputation as a humble Mr. Fix-It, someone who understands ordinary Indonesians and gets things done. He’s putting that popularity to the test with a call to cut Indonesia’s fuel subsidies.

In one of his first comments on economic policy, Widodo last week took aim at Indonesia’s decades-old fuel subsidy, a perennial bugbear that successive governments have failed to end. The subsidies should be gradually reduced and funds diverted to help low-income people, the current Jakarta Governor, 52, said May 3 in East Java, where he was seeking support from Muslim clerics.

“Putting this high up on the agenda at this stage is politically dangerous,” Keith Loveard, head of political risk analysis at Jakarta-based security company Concord Consulting, said in an e-mail yesterday. While phasing out subsidies over several years makes sense, “expecting ordinary people to think long-term is far too optimistic,” he said.

Success would reduce local demand for government-funded cheap fuel that’s hurt the current account and currency, while freeing up budget funds for the roads, ports and power networks needed to spur investment and create jobs in the world’s fourth-most populous nation. Widodo will first need to win over voters in a nation where protests accompanied past price increases and riots spurred by soaring living costs helped oust the dictator, Suharto, in 1998.

Subsidies could be reduced within four years with the funds used instead to subsidize farmers for fertilizer, irrigation and seeds, and diesel oil for fishermen, Widodo said in the May 3 interview. A small fuel subsidy would remain, he said.

Boosting Credentials

“The stance would bode well for the management of fiscal policy and energy efficiency in a potential Widodo presidency,” said Kevin O’Rourke, a political analyst who wrote the book “Reformasi: The Struggle for Power in Post-Soeharto Indonesia”. “It seems likely that his support is sufficiently strong to withstand negative sentiment. Meanwhile, his courage in openly addressing a major problem could bolster his credentials as a results-oriented politician.”

A survey before Widodo gave his views on the fuel policy showed he probably had the support to win the July 9 presidential vote even as his popularity fell from a previous poll. The Saiful Mujani Research and Consulting poll done April 20-24 showed more respondents would choose Widodo for president than any other candidate, including tycoon Aburizal Bakrie, a former economy minister, and ex-general Prabowo Subianto.

Forecasts Cut

The owner of a furniture business and former mayor of the Central Java town of Solo, Widodo would inherit Southeast Asia’s biggest economy as growth slows, investment cools and the country confronts scrutiny over its external and public finances from investors.

Analysts from PT Bank Danamon Indonesia to DBS Group Holdings Ltd. cut their 2014 gross domestic product forecasts after Indonesia this week reported first-quarter expansion that was the slowest since 2009. The rupiah slumped more than 20 percent last year, the worst performer among 11 Asian currencies tracked by Bloomberg, as the prospect of a tapering in U.S. monetary stimulus spurred outflows from emerging markets perceived to have bigger risks.

The central bank, forecast by all economists in a Bloomberg survey to keep its benchmark interest rate unchanged tomorrow, tightened monetary policy last year to rein in the current-account shortfall, which reached a record in the second quarter of 2013. President Susilo Bambang Yudhoyono in June raised fuel prices for the first time since 2008, after an earlier plan in 2012 was derailed by protests.

‘Bold’ Plans

Those efforts, along with optimism Widodo could bring policy changes to drive the economy, helped stocks and the rupiah rebound from the declines seen in 2013, making the currency the region’s top gainer this year. Widodo hasn’t laid out a policy platform as he works to build an alliance with other parties that will enable him to run for the presidency in July.

“Clearly he understands that subsidy rationalization is a key concern in the market, and the negative perception that lingering uncertainty creates, among foreign investors,” said Wai Ho Leong, a regional economist at Barclays Plc in Singapore. “If he has bold long-term plans to step up infrastructure spending, he has to have an equally bold vision on how to cut back on subsidies to free up fiscal resources.”

Indonesia allocated 210.74 trillion rupiah ($18 billion) for fuel subsidies in this year’s budget, more than the 2013 budget of 199.85 trillion rupiah for fuel, according to data on the Finance Ministry’s website. The amount overshadows the 206.6 trillion-rupiah infrastructure outlay and the 70.5 trillion-rupiah health spending.

‘Must Cut’

“Those who now receive fuel subsidies are people who have,” Widodo said in the interview, referring to the well-to-do. “There will still be a little, but step by step it must be cut.”

While Yudhoyono’s government has explored a variety of options to revamp budget spending, including limiting the use of partially government-funded diesel, it has kept the price of subsidized gasoline at 6,500 rupiah ($0.65) a liter and diesel at 5,500 rupiah since the last increase in June. Current Finance Minister Chatib Basri said last week the country plans to redesign subsidies to make them more targeted.

Key Dilemma

Widodo has a chance to push through the change he is calling for, according to economists including Barclays’s Leong and Destry Damayanti at PT Bank Mandiri. The politician’s popularity may even get a boost as the money saved allows him to compensate poorer households with other subsidies, Leong said.

“The positive news is that at least he has focused on a key policy dilemma, and probably a phased-out program is inevitable,” Hal Hill, a professor of Southeast Asian economies at Australian National University in Canberra, said by e-mail yesterday. The worry is that Widodo favors aid for specific groups such as fishermen and farmers when “there are plenty of other things to spend the money on, such as general infrastructure and health,” he said.

The presidential candidate has won fans with a hands-on approach to solving problems adopted when he became the first directly-elected mayor of Solo in 2005: Find out what concerns people by making daily visits to the areas where they live. As Jakarta governor since late 2012, Widodo has begun building a monorail in the capital and started construction on a metro train line that had been delayed for years.

“Looking at what Widodo already did in Jakarta, he’s not afraid to make a change,” said Damayanti.

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