No Dissent to Fuel Price Hike by Markets

Conditional Love: Markets broadly supportive of subsidized fuel price hike — as long as infrastructure follows

Jakarta Globe, Muhamad Al Azhari & Vanesha Manuturi, Nov 18, 2014

Financial markets responded to the fuel price increase positively. The benchmark
 stock index rose 0.96 percent to close at 5,102.47 on Nov. 18, a day after the
president Joko Widodo announced the fuel price increase. (Reuters Photo/Beawiharta)

Jakarta. Economists and local executives praised President Joko Widodo’s decision to raise the price of subsidized fuel, a move considered a bold first step toward further fiscal reform.

Joko raised the subsidized fuel price by an average 33.6 percent as he eyes plans to shift subsidy government spending toward productive sectors, such as infrastructure and education investments.

“This gutsy policy will allow him to unburden himself from the heavy shackles which held back previous administrations, because of one simple rule: You need money to do stuff in life,” said Wellian Wiranto, a Singapore-based economist with OCBC Bank.

“It will not escape the market’s attention, too, that this is a man who manages to do this within less than a month in office, and, crucially, in an environment where tyglobal oil prices are dropping,” Wellian said.

“Previous administrations have largely chosen the more convenient path of discussing and deliberating until their backs are shoved against the wall of incessant global oil price upticks before they did the inevitable,” he said, referring obliquely to  former President Susilo Bambang Yudhoyono.

Joko’s move is slated to save around Rp 120 trillion ($9.8 billion) in the 2015 budget, which can now be re-allocated to other sectors rather than being burned in people’s vehicles while they are stuck in traffic jams.

Barclays Research sent a note to clients on Tuesday that said the fuel price hike could help Indonesia to help curb the oil deficit and support portfolio inflows.

Singapore-based economists, including Wai Ho Leong, Barclays’ senior regional economist for Asia excluding China, contributed to the note.

“We deem the fuel price hike to be supportive of the rupiah, and in the near-term we think the rupiah is likely to strengthen,” the note said, adding that their analysts believe the fuel hike is positive on two fronts.

The note highlighted that Indonesia’s oil trade deficit has gradually widened in recent years due to rising domestic fuel consumption.

“While rapid income growth is probably the main driver [for higher fuel consumption], artificially depressed prices [in fuel products] have also contributed to higher consumption.”

“A decisive move by Joko to raise prices, accompanied by a roadmap for longer-term fuel subsidy reforms, will be critical in limiting oil consumption and import growth over the longer-run,” the note said.

Indonesia’s government has perennially found that demand for subsidized fuel exceeded the quota set aside.

This year state oil company Pertamina estimated that the country will be short 1.9 million kiloliters of subsidized fuel, as demand exceeds the annual quota of 46 million kiloliters.

The Barclays note also said that the price hike helps narrow of Indonesia’s trade deficit, which traditionally has been driven by broad-based import compression rather than stronger exports.

Such a trend — which means that fewer capital goods have been imported, supporting the local manufacturing sector — has contributed to the slowdown in economic growth.

“Should infrastructure spending increase in coming years, as promised by Joko, growth and capital goods imports could rebound,” the Barclays note said.

Indonesia’s trade deficit shrank in September after imports slowed.

The Central Statistics Agency reported a smaller trade deficit of $270 million in September versus a revised $311 million in August.

In September, exports grew 3.87 percent, while imports rose 0.23 percent.

That compares with a 10.6 percent growth in exports and a 13.7 percent expansion of imports in August.

“Policies to curb the oil deficit, along with broader measures to encourage exports and domestic manufacturing, are thus essential in preventing a renewed widening of the overall trade deficit,” the Barclays note said.

The Barclays note also said that “the ability of Joko to push through a fuel price hike shortly after taking office should strengthen investor confidence in his administration’s resolve to implement crucial but unpopular economic reforms.”

“This should help sustain foreign portfolio flows into Indonesian markets, providing support for the rupiah at a time when concerns over current account funding could rise due to the end of the third round of  quantitative easing and Fed policy normalization,” the Barclays note said.

Indonesia’s economy slowed in the third quarter of 2014 to the lowest level in five years, as weaker exports dragged down economic expansion even as private consumption remained strong.

Indonesia’s economy expanded by 5.01 percent in the three months ending September compared with the same period last year.

That compares with a 5.12 percent year-on-year expansion in the second quarter.

Financial markets responded to the Joko’s move positively. The benchmark stock index rose 0.96 percent to close at 5,102.47 on Tuesday.

As many as 6.3 billion shares worth more than Rp 5.3 trillion changed hands on the day.

Foreign investors, which contributed to 34 percent of the day’s trading, bought Rp 243.7 billion more shares than they sold. Gainers beat losers 192 by 111.

Meanwhile, the rupiah strengthened to 12,146 per dollar on Tuesday from 12,193 on Monday, according to data from the central bank. The yields for benchmark 10-year government bonds declined to 8.0319 percent from 8.0457 percent.

A lower yield, suggesting that investors take lower risks premiums over the securities, reflected their confidence over the overall economy.

Sara Loebis, corporate secretary of United Tractors, the heavy equipment distributor arm of Astra International, said that the fuel price hike would affect much of its operations since the company uses industrial fuel. Industrial fuel is priced more expensively than the subsidized fuel.

“If state funds from fuel subsidy can be diverted to more productive sectors such as infrastructure, this would indirectly open up the heavy machinery market.”

Irwanto, corporate secretary at BW Plantation did not rule out that the expected higher inflation may trigger the company’s operational costs to soar.

“But that may only have effects for about for 42 days to 2 months, I think,” he said.

“As long as the budget is used towards infrastructure development, we support the decision because it will eventually bring down costs.”

“In Indonesia, everything is expensive because our infrastructure is lacking,” Irwanto said.

Further coverage

• Indonesia Mostly Nonplussed Over Fuel Price Hike
• Govt Moots Floating Subsidized Fuel Price Next Year
• Editorial: Test Taken, Passing With Flying Colors