Despite the government having cut prices of low-octane gasoline by 13 percent to IDR 6,600 per liter and diesel by 15 percent to IDR 6,400 per liter in mid-January 2015, few analysts expect to see deflation this January.

In recent months several significant changes to Indonesia’s fuel policy have been made. Since the Suharto-era, when Indonesia was an oil exporter (and member of the OPEC), generous government subsidies were given to provide cheap fuels to Indonesians. However, robust domestic fuel consumption growth in combination with declining domestic oil output (turning Indonesia into an oil importer in the mid-2000s) as well as rising global oil prices meant that these fuel subsidies became an increasingly heavy burden that seriously troubled the government’s budget deficit and the country’s trade balances (and hence placing downward pressure on the rupiah exchange rate). In the era of Reformation, several governments raised subsidized fuel prices (triggering public outcry as administered price adjustments have a major impact on inflation in Indonesia and may increase the country’s poverty rate). The current President Joko Widodo administration introduced a 30 percent subsidized fuel price hike in November 2014 in an effort to create more fiscal space for public investment in the country’s infrastructure, maritime sector, healthcare and education as well as to curb the country’s wide current account deficit which is hovering around 3 percent of GDP. However, as global oil prices declined nearly 60 percent in the past six months, the county’s subsidized fuel prices suddenly became more expensive than the real market price. Therefore, Widodo took the opportunity to scrap subsidies for low-octane gasoline altogether and implement a fixed IDR 1,000 per liter subsidy for diesel (solar) at the start of January 2015, therefore moving a big step closer to a full market-based price mechanism. Prices of gasoline and diesel are now evaluated and set each month, thus floating in line with global oil prices (while also taking into account rupiah exchange rate fluctuation).

However, it will still take time before Indonesia’s annual inflation pace is back to a more healthy level. Agus Martowardojo, Governor of Indonesia’s central bank (Bank Indonesia), recently said that he expects annual inflation to be back within the central bank’s target range of between 3 and 5 percent (y/y) by the fourth quarter of 2015.

Inflation in Indonesia:

Month  Monthly Growth
 Monthly Growth
January          1.03%          1.07%
February          0.75%          0.26%
March          0.63%          0.08%
April         -0.10%         -0.02%
May         -0.03%          0.16%
June          1.03%          0.43%
July          3.29%          0.93%
August          1.12%          0.47%
September         -0.35%          0.27%
October          0.09%          0.47%
November          0.12%          1.50%
December          0.55%          2.46%
Total          8.38%          8.36%

Source: Statistics Indonesia (BPS)

Inflation of Indonesia 2008-2014:

   2008  2009  2010  2011  2012  2013  2014
(annual percent change)
  9.8   4.8   5.1   5.4   4.3   8.4   8.4

Source: World Bank

Regarding economic growth in 2015, Martowardojo expects that - despite serious challenges such as US monetary tightening, falling commodity prices and sluggish global economic growth - Indonesia will grow by 5.8 percent (y/y), significantly higher than the estimated GDP growth rate of 5.1 percent (y/y) in 2014, while the current account deficit may ease to between 2.5 and 3.0 percent of GDP. In the third quarter of 2014, this deficit was USD $6.8 billion, or equivalent to 3.07 percent of GDP. He expects to see a trade surplus of over USD $100 million in the last month of 2014.