Rising Crude Oil Prices Cause Surging Energy Subsidy Bill
The government of Indonesia needs to keep spending on energy subsidies under control. Looking at the latest data, released by the Finance Ministry on Wednesday (03/01), the government spent IDR 7.4 trillion (approx. USD $573 million) more on energy subsidies (fuel, LPN and electricity) throughout 2017 than it had targeted in the (revised) 2017 state budget.
While the Indonesian government targeted to spend a maximum of IDR 89.86 trillion (approx. USD $6.6 billion) on energy subsidies in 2017, actual spending on energy subsidies was recorded at IDR 97.6 trillion (approx. USD $7.2 billion).
Considering the positive outlook for global growth in 2018, chances are big that crude oil prices will continue to rise. Today (04/01) crude oil hit fresh two-and-a-half year highs amid concerns about supply disruptions in Iran, while the Organization of the Petroleum Exporting Countries (OPEC) seems committed to its production cut plans (at least until March 2018). Brent oil is now at USD $68.13 per barrel, while US West Texas Intermediate touched USD $62.10 a barrel.
Meanwhile, the Indonesian government set its Indonesian Crude Price (ICP) rather low in both the 2017 and 2018 state budgets. If the ICP assumption is too far out of tune with the actual price (specifically when the ICP assumption is lower than the actual price), then it causes some distortions to the budget as the budget for energy subsidies is bound to rise. However, a higher-than-targeted ICP also means Indonesia can earn more from its oil & gas exports. This is a positive matter. In fact, Indonesian Finance Minister Sri Mulyani Indrawati said - in case of a higher-than-budgeted ICP - the rise in government revenue outpaces the rise in energy subsidies.
The Indonesian government assumed the ICP at USD $45 per barrel in the revised 2017 state budget, while the actual ICP was recorded at an average of USD $50 a barrel as crude oil prices recovered better than expected last year.
In 2018, the discrepancy may become larger as the government set its ICP assumption at USD $48 per barrel in the 2018 state budget, while international crude oil prices are now above USD $60 per barrel.
Besides the higher-than-assumed ICP, the second reason why Indonesia's energy subsidy spending was higher than budgeted last year is carryovers from the preceding year. The central government had not transferred all funds - covering 2016 - to state-owned oil & gas company Pertamina and state-owned electricity company Perusahaan Listrik Negara (PLN) that sell certain energy products at subsidized prices to Indonesian consumers.
The table below shows that the Indonesian government - under the leadership of Indonesian President Joko Widodo - has successfully managed to cut energy subsidies drastically since 2014. Rather than spending a massive amount of funds for the consumption of fuel and electricity by the huge population, the government decided to relocate a significant chunk of these funds to infrastructure and social development programs that bring structural economic growth for Indonesia.
It is important that the government continues its energy subsidy reforms in the years ahead. This includes raising the price of subsided fuels. Naturally, this will bring some risks because hiking fuel prices is not a popular move (especially when approaching elections it can involve some political risks). However, considering international oil prices are rising, it is the only way to meet the government's energy subsidy spending target that is set in the 2018 state budget.
Indonesia's Energy Subsidy Spending & Indonesian Crude Price:
(in IDR trillion)
|1. Fuel & LNG
(in IDR trillion)
(in IDR trillion)
¹ assumption set in revised state budget
² preliminary figure
Source: Finance Ministry of Indonesia