Widodo Committed to Curb Indonesia Fuel Subsidy After Rebuff

The incoming Indonesian government of Joko Widodo remains committed to reducing the country’s fuel-subsidy program, after outgoing President Susilo Bambang Yudhoyono rejected his request to scale it back.

President-elect Widodo, known as Jokowi, wants to divert the subsidy to farmers and fishermen, he said in Jakarta today. Legally, Jokowi could move to adjust fuel prices this year without needing parliamentary approval, Achmad Farial, deputy chairman of parliament’s energy commission, said today.

Shrinking the cost of the fuel subsidy will give Jokowi more room to fund a policy agenda that includes widening access to health care and reducing inequality. Jokowi is seeking to spur Southeast Asia’s largest economy, now growing at the slowest pace since 2009, with investors hopeful the subsidy will be spent on improving the country’s infrastructure.

“We want a diversion from consumption to productive use,” Jokowi told reporters. “Currently the subsidy is burnt for cars, and later on it will be diverted to productive use in villages for fertilizer, seeds, and diesel for fishermen.”

Some $24.9 billion has been earmarked for fuel subsidies in the 2015 government budget drafted by Yudhoyono’s administration, or 14 percent of total spending. Jokowi can revise the 2015 budget as early as the fourth quarter of 2014, said Eric Alexander Sugandi, an economist at Standard Chartered Plc in Jakarta.

‘Huge Potential’

The rupiah was steady at 11,694 per dollar in Jakarta as of 4:29 p.m. in Jakarta, according to prices from local banks. The currency has “huge potential” to gain once the government’s reform process starts, with the phase-out of fuel subsidies to have a positive impact on the nation’s fiscal and current account, said Christian Wildmann, a fixed-income fund manager at Union Investment Privatfonds in Frankfurt.

Yudhoyono, who steps down in October after a decade in power, said it’s not a conducive time to raise prices, Widodo said in Jakarta yesterday after a meeting between the two on Aug. 27, news website Tempo reported. That puts the burden on Widodo himself to take a politically unpopular step central to his economic agenda.

Yudhoyono and Widodo agreed to have their officials hold further talks on the budget of the world’s fourth-most populous country, they told reporters in Nusa Dua, Bali, on Aug. 27.

This year’s budget no longer requires parliamentary approval for a fuel price change, meaning the decision is the government’s, said the parliament’s Farial.

Economically Vulnerable

“It can be done by the administration of SBY or Jokowi-JK later on in the 2014 state budget,” he said, referring to Yudhoyono by his initials and to Jokowi’s Vice President-elect Jusuf Kalla. There is no provision for when a budgetary revision can be submitted, he said.

Indonesia’s system of providing set gasoline prices leaves the country, a net oil importer, economically vulnerable. A sudden rise in prices, such as from tensions in the Middle East, widens the budget deficit, worsens the trade balance and can weaken the rupiah.

Jokowi said he wants as small a budget deficit as possible and is ready to implement unpopular policies, according to the report in Tempo, an Indonesian media company.

Yudhoyono’s administration raised fuel prices in 2013, after delaying the move for a year because of parliamentary opposition and public protests. Late dictator Suharto was ousted in 1998 in part because of demonstrations over fuel-price increases.

Opening Taps

State energy company PT Pertamina restricted sales of the cheap fuel earlier this month, and then backtracked by opening up the taps as long queues formed at pump stations.

“The issue of raising fuel is not about daring or not daring,” said Firmanzah, a spokesman for Yudhoyono. “The policy must be throughly prepared on how to address the impact, because it will affect economic growth and create a rising burden for the people.”

Not every president wants to take the risk of dealing with fuel-subsidy reform, Vice Finance Minister Bambang Brodjonegoro said in an interview on Aug. 12. Yet failure to scale back the system and use part of the proceeds to invest in infrastructure would risk economic growth slumping below 5 percent in three to five years, he said.

Gross domestic product rose 5.12 percent in the second quarter from a year earlier. Yudhoyono’s proposed 2015 budget assumes GDP expansion of 5.6 percent, and Jokowi wants to target higher growth of 5.8 percent by cutting red tape and boosting investment, Arif Budimanta, a member of his economic team, said today.

“What a missed opportunity for SBY to rescue his legacy,” said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp., referring to Yudhoyono by his initials. “The market in general had very little expectation that SBY would do the right thing and cut subsidies before he leaves.”

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