After President Joko Widodo decided to raise prices of subsidized fuels (low octane gasoline and diesel) by more than 30 percent in mid-November 2014, it was suddenly more expensive to buy low-octane gasoline in Indonesia (IDR 8,500) than on the international market due to the impact of significantly falling global oil prices. Therefore, the government needed to revise its fuel subsidy scheme again which included the scrapping of gasoline subsidies altogether and lowering of the low-octane gasoline price from IDR 8,500 (USD $0.66) to IDR 7,600 (USD $0.63) per liter and diesel from IDR 7,500 (USD $0.60) to IDR 7,250 (USD $0.58) per liter as of 1 January 2015. The government also announced that it would set retail prices for diesel and gasoline on a monthly basis, fluctuating in line with the movement of international oil prices, thus moving a giant step closer to applying a market-based price mechanism.

Indonesia’s fuel subsidy reforms imply that the central government’s subsidy costs are reduced by about 83 percent. Initially, the 2015 State Budget - made by the previous administration under the leadership of Susilo Bambang Yudhoyono - allocated up to USD $22 billion for fuel subsidies. These funds can now be saved and used for economic and social development (in line with promises made by President Joko Widodo during his presidential election bid), which include much needed infrastructure and agriculture development, as well as enhancing the nation’s healthcare and education to improve human capital. For international credit rating agencies this may be a reason to improve their outlook for the Indonesian economy as limited fuel subsidies should translate to an improvement in Indonesia’s current account deficit. Although easing, the country’s current account deficit is still wide at USD $6.84 billion, or 3.07 percent of Indonesia’s gross domestic product (GDP) in the third quarter of 2014 and makes the country highly vulnerable to capital outflows in times of global shocks (such as looming higher US interest rates). Moreover, lower fuel prices will also have a positive impact on inflation which had accelerated sharply (to 8.36 percent y/y in December 2014) after the subsidized fuel price hike in November. Earlier this week, the World Bank released a publication that made mention of the positive effects of lower global oil prices on large oil-importing emerging nations such as Brazil, India, Indonesia, South Africa and Turkey.

Indonesia’s gasoline and diesel prices for January were based on the Mean of Platts Singapore (MoPS), which is the average of a set of Singapore-based oil product price assessments published by Platts. When this average (MoPS) rises or falls by USD $1 then it adds or deducts approximately IDR 60 per liter of Indonesia’s low-octane gasoline price.