The sharply depreciated Indonesia rupiah exchange rate in combination with the inability to raise domestic production of crude oil threatens to balloon government subsidy expenditure. Fuel subsidies may increase 20 percent to IDR 252 trillion (USD $20.8 billion) in 2014 as the rupiah currently has about 14 percent less value (based on the Bloomberg Dollar Index) than the value assumed in the 2014 State Budget (APBN 2014). The government assumed a rupiah rate of IDR 10,500 per US dollar in the APBN 2014.
Last year, the similar scenario happened when fuel subsidies were set at a maximum of IDR 200 trillion in the State Budget but due to sharp rupiah depreciation, falling domestic oil production and continued expensive oil imports (amid Indonesia's rising demand for fuels) subsidy spending for fuels totaled IDR 250 trillion at the end of the year. That year, the government estimated the rupiah at IDR 9,600 per US dollar in the State Budget but it ended the year at over IDR 12,000 per US dollar.
Last week, the government announced to lower its target for domestic oil production in 2014 from 870,000 barrels per day (bpd) to 820,000 bpd as there has been a delay in the start of production of the Cepu Block (which is said to contain the largest known oil reserves that Indonesia is yet to exploit). Production at this block should have started in May 2014 but was postponed to November 2014 amid various bottlenecks.
Indonesia, once an important oil exporter and member of the OPEC, has shown declining oil production rates for over a decade due to mature oil fields in combination with a lack of exploration and other investments in this sector. Slowing investments are partly caused by a weak regulatory system and legal uncertainty, thus resulting in declining investor confidence.
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