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Indonesia outlines fuel plan in bid to calm markets
Indonesia's president said on Wednesday that he would raise sensitive fuel prices but only once the poor have been cushioned from the blow, as he sought to avert an economic crisis and revive investor confidence. Facing his sternest economic test since taking office last October, Susilo Bambang Yudhoyono said high fuel subsidies that eat up one fifth of the budget threatened the fiscal sustainability of the world's fourth most populous nation. He said he would not abolish subsidies completely, and only hike fuel prices by an unspecified amount after a scheme to compensate the poor was in place by September or October. "We will make sure that the poor get the money before we increase fuel prices," Yudhoyono said in a speech broadcast on national television. "We will remain strong and faithful that we can resolve this problem. We need your support." Analysts said while Yudhoyono had probably helped calm markets, they had hoped for more action and a clear timeframe and specifics on fuel price hikes. Yudhoyono had not exercised the mandate he won in Indonesia's first direct presidential election, some said. "It is disappointing. Whether you call it a subsidy or special scheme, one way or the other the government will have to pay for it," said Lloyd Ong, a credit analyst at BNP Paribas in Hong Kong. "It is reactive, and the government is not taking the full pain at this point in time." Indonesia imports significant amounts of oil and oil products while holding domestic prices artificially low. It has been forced to sell rupiah for dollars to pay for its oil imports, depressing the local currency. That means record-high oil prices act as a triple-whammy for the country, hurting its currency, economy and budget. ROLLERCOASTER RIDE The rupiah and Jakarta stocks have been on a rollercoaster ride this week as investors have fretted about Indonesia's economy in light of soaring world oil prices. However, the rupiah barely moved after Yudhoyono's speech, and was being quoted at 10,200 per dollar. It tumbled to a four-year low of 11,750 on Tuesday before the central bank sharply jacked up interest rates to stem the slide. By delaying the fuel price hike, Yudhoyono would have more time to prepare the public. Indonesia raised fuel prices by an average 29 percent in March, sparking protests across the impoverished country of 220 million people, although there was little violence. A big hike in domestic fuel prices in 1998 triggered widespread protests and rioting that were a factor behind the downfall of longtime autocrat Suharto in May of that year. "This is his biggest political challenge yet because it's a nationwide problem and unlike the tsunami he has to take unpopular moves," said Indonesian political analyst Bara Hasibuan. Indonesia was hardest hit by the December 26 tsunami, which left 170,000 people dead or missing in northwest Aceh province. Yudhoyono also promised to build more oil refineries, carry out an overhaul of the investment regime and punish anyone speculating in the foreign exchange market. POPULAR PRESIDENT A poll published on Wednesday, but conducted before the latest market swings, showed barely 40 percent of respondents were satisfied with the performance of the president's economic ministers and 44 percent said they were unhappy. But overall, nearly two-thirds of the 1,000 people polled from Aug 13-16 said they were satisfied with the former general. So far, the impact on other markets has been limited, and analysts are not predicting an imminent round of "contagion", such as during the Asian financial crisis of 1997-98. Standard & Poor's said earlier that pressure on the economy from high oil prices and a weak currency might force the ratings agency to review its outlook on Indonesia's credit rating if the government did not offer credible policy steps. The outlook is currently positive. After Indonesian markets plunged early on Tuesday, the central bank raised rates by 3/4ths of a percentage point. The Jakarta Composite Index finished up 1 percent on Wednesday. It had lost 5 percent on Monday and extended that slide early on Tuesday before storming back. Indonesia has the cheapest gasoline in Asia at around 20 U.S. cents per litre. It has earmarked 101.8 trillion rupiah ($9.88 billion) for such subsidies this year.
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