Indonesia Plans Fuel-Price Boost To Calm Markets
WSJ.com - Indonesia Plans Fuel-Price Boost To Calm Markets
By PATRICK BARTA
Staff Reporters of THE WALL STREET JOURNAL
September 1, 2005; Page A9
JAKARTA, Indonesia -- Indonesian President Susilo Bambang Yudhoyono said his government will raise fuel prices after October as part of moves to further stabilize the country's rattled currency and stock markets.
The president's announcement yesterday lacked details and, as a result, disappointed some analysts and heightened worries that Southeast Asia's biggest economy could face further instability if global oil prices continue to rise.
In a news conference, Mr. Yudhoyono said government subsidies used to keep fuel prices low for average Indonesians were "putting heavy pressure on the budget ... [and] if this continues, fiscal sustainability will be in jeopardy and they will hurt the macroeconomy."
The timing of cuts in the country's costly fuel subsidies wasn't clear. The president said more time is needed to find ways to cushion the blow on the poor. He indicated a program to help poor Indonesians will be in place by October, and that after that fuel prices will be increased.
Once already this year, at the start of March, Indonesia announced it was raising fuel prices, by an average of 29%. But spikes in oil prices -- and spending for Jakarta's costly subsidies -- make the issue a critical one for the country.
Mr. Yudhoyono's failure to offer a more concrete timeline highlighted the pressure his government faces as it struggles to cope with oil priced above $60 a barrel. Although much of Asia also subsidizes consumer fuel prices, Indonesians pay only about 24 cents per liter for gasoline, the least in the region.
Many analysts fear raising those prices could lead to widespread social unrest, as it did in the late 1990s when fuel-price increases helped stir riots that played a role in bringing down the authoritarian President Suharto. There were nationwide protests -- though mostly low-key and nonviolent ones -- when the government announced March's series of fuel-price increases.
It is clear the government no longer can afford the cost of subsidies. This year, Indonesia's oil subsidies are expected to total as much as $14 billion, or roughly one-quarter of all government spending.
Concerns about Indonesia's ballooning subsidy bill helped drive the rupiah to a four-year low earlier in the week, and the country's stock market also has fallen. Markets, which rose sharply Tuesday after the central bank raised interest rates three-quarters of a percentage point, gained again yesterday.
But analysts worry that interest-rate moves alone won't be enough to remove the pressure on the rupiah.
"Without any action on the subsidies, I think they remain exposed to more ... selling of the currency," said Tim Condon, an economist at ING in Singapore. He noted that while most Indonesian companies are in better shape to withstand a currency crisis than in the 1990s, others -- particularly telecommunications firms -- could face risks, as they have large dollar-denominated debts but receive income in rupiah.
Some analysts were pleased to hear that Mr. Yudhoyono was willing to put politically sensitive fuel subsidies on the table. David Cohen, an analyst at Action Economics in Singapore, said the country's willingness to raise interest rates so sharply gives it some credibility that it will follow through on a fuel-price increase later this year.
Write to Patrick Barta at patrick.barta@wsj.com
By PATRICK BARTA
Staff Reporters of THE WALL STREET JOURNAL
September 1, 2005; Page A9
JAKARTA, Indonesia -- Indonesian President Susilo Bambang Yudhoyono said his government will raise fuel prices after October as part of moves to further stabilize the country's rattled currency and stock markets.
The president's announcement yesterday lacked details and, as a result, disappointed some analysts and heightened worries that Southeast Asia's biggest economy could face further instability if global oil prices continue to rise.
In a news conference, Mr. Yudhoyono said government subsidies used to keep fuel prices low for average Indonesians were "putting heavy pressure on the budget ... [and] if this continues, fiscal sustainability will be in jeopardy and they will hurt the macroeconomy."
The timing of cuts in the country's costly fuel subsidies wasn't clear. The president said more time is needed to find ways to cushion the blow on the poor. He indicated a program to help poor Indonesians will be in place by October, and that after that fuel prices will be increased.
Once already this year, at the start of March, Indonesia announced it was raising fuel prices, by an average of 29%. But spikes in oil prices -- and spending for Jakarta's costly subsidies -- make the issue a critical one for the country.
Mr. Yudhoyono's failure to offer a more concrete timeline highlighted the pressure his government faces as it struggles to cope with oil priced above $60 a barrel. Although much of Asia also subsidizes consumer fuel prices, Indonesians pay only about 24 cents per liter for gasoline, the least in the region.
Many analysts fear raising those prices could lead to widespread social unrest, as it did in the late 1990s when fuel-price increases helped stir riots that played a role in bringing down the authoritarian President Suharto. There were nationwide protests -- though mostly low-key and nonviolent ones -- when the government announced March's series of fuel-price increases.
It is clear the government no longer can afford the cost of subsidies. This year, Indonesia's oil subsidies are expected to total as much as $14 billion, or roughly one-quarter of all government spending.
Concerns about Indonesia's ballooning subsidy bill helped drive the rupiah to a four-year low earlier in the week, and the country's stock market also has fallen. Markets, which rose sharply Tuesday after the central bank raised interest rates three-quarters of a percentage point, gained again yesterday.
But analysts worry that interest-rate moves alone won't be enough to remove the pressure on the rupiah.
"Without any action on the subsidies, I think they remain exposed to more ... selling of the currency," said Tim Condon, an economist at ING in Singapore. He noted that while most Indonesian companies are in better shape to withstand a currency crisis than in the 1990s, others -- particularly telecommunications firms -- could face risks, as they have large dollar-denominated debts but receive income in rupiah.
Some analysts were pleased to hear that Mr. Yudhoyono was willing to put politically sensitive fuel subsidies on the table. David Cohen, an analyst at Action Economics in Singapore, said the country's willingness to raise interest rates so sharply gives it some credibility that it will follow through on a fuel-price increase later this year.
Write to Patrick Barta at patrick.barta@wsj.com
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