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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.
Indonesia's electricity subsidies may exceed the IDR 38.39 trillion (approx. USD $2.8 billion) allocated in the 2016 State Budget as there are probably more customers entitled to electricity subsidy than previously estimated. Last month, the Indonesian government and House of Representatives (DPR) agreed on cutting electricity subsidies for 450 VA and 900 VA households, per 1 January 2016, by disconnecting those people that are currently enjoying cheap electricity rates while they are not classified as 'poor' or 'near-poor' and thus do not deserve the subsidized price.
Credit rating agency Standards & Poor's (S&P) says Indonesia (and Malaysia) need to increase efforts to build a good track record of timely and reasonable power tariffs adjustments in order to ensure decent returns for investors and recover their costs. Delays in energy price revisions, which are sometimes the result of political strategy, are the key risk that jeopardize the financial stability (and credit profile) of state-owned utility company Perusahaan Listrik Negara (PLN). S&P therefore advises the Indonesian government to enhance efforts to ensure a sound regulatory framework (i.e. a transparent tariff rate-setting mechanism).
On Friday (14/08) the Indonesian government unveiled its 2016 State Budget draft at a session in the House of Representatives (DPR). The draft is important as it shows government targets regarding the macroeconomy of Indonesia and it shows on what fields the government will focus in terms of public spending. The government - led by Indonesian President Joko Widodo - is optimistic that economic growth will finally rebound after four years of slowing economic growth as its 2016 GDP growth target was set at 5.5 percent (y/y).
Due to the Indonesian government’s plan to increase biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter - in a move to protect the domestic biofuel industry - palm oil futures climbed the most in 28 months. Amid the world’s current low crude palm oil (CPO) prices, Indonesian biofuel producers have it rough as production costs exceed market prices and therefore requested the government to raise biofuel subsidies to offset losses. If approved by Indonesian authorities then this move should result in higher palm oil demand.
Due to sharply fallen global crude oil prices the Indonesian government announced on Friday (16/01) that prices of fuels (low-octane gasoline and diesel) will be cut by an average of 14 percent, effective from Monday (19/01). The price of gasoline will drop 13 percent to IDR 6,600 (USD $0.53) per liter and diesel by 15 percent to IDR 6,400 (USD $0.51) per liter. Lastly, the government also reduced the price of Pertamina’s liquefied petroleum gas (LPG) by 4.2 percent to IDR 129,000 per 12-kilogram-cannister.
Indonesia’s Chief Economics Minister Sofyan Djalil said that Indonesia will further reduce prices of low-octane gasoline and subsidized diesel at the end of this month as global oil prices continue to fall (touching five-year lows). On 1 January 2015, the Indonesian government had already removed subsidy for widely-used low-octane gasoline (premium), while a fixed subsidy scheme was introduced for diesel (solar) meaning that the government now provides a subsidy of IDR 1,000 (USD $0.08) per liter of diesel.
The Indonesian government has further reformed its decade-old fuel subsidy policy in a move to streamline - and make more structural use of - public spending. The latest change is effective from today (1 January 2015) and thus Indonesia moved a step closer to applying a market-based price mechanism. The government now uses a fixed diesel subsidy of IDR 1,000 (USD $0.08) per liter, while subsidy for low-octane gasoline is scrapped altogether (however the government will account for gasoline distribution costs outside Java, Madura and Bali).
Indonesia’s Central Statistics Agency (BPS) announced on Monday (01/12) that the country’s inflation figure accelerated to 6.23 percent year-on-year (y/y) in November 2014 (from 6.23 percent y/y in the previous month) due to the impact of higher subsidized fuel prices implemented by the Indonesian government. On 18 November, prices for subsidized fuels (low-octane gasoline and diesel) were raised by more than 30 percent in a bid to reallocate public spending from fuel consumption to productive long-term development.
On 23 November 2014, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic matters such as the country’s higher subsidized fuel prices, the central bank’s key interest rate, a revised inflation outlook, geothermal power development, external debt, and more.
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In order to curb imports of oil, the government of Indonesia intends to stimulate the production of crude palm oil-based biofuel by increasing the mandatory content of fatty acid methyl ester (which is made from palm oil) in biodiesel products from 7.5 percent to 10 percent. Through this policy, the government claims to be able to save up to USD $3 billion as it needs less fuel imports. Fuel imports totaled USD $5.8 billion in the first six months of 2013 and form a major cause for the USD $9.8 billion current account deficit in Q2-2013.
The government of Indonesia proposes to allocate IDR 336.24 trillion (USD $32.6 billion) for subsidy spending in the 2014 state budget draft: IDR 284.7 trillion (USD $27.6 billion) for energy subsidies and IDR 51.6 trillion (USD $5.0 billion) for non-energy subsidies. The proposed amount implies a 3.41 percent fall in total subsidy allocation compared to Indonesia's state budget in 2013. However, despite a reduction, subsidy expenditure is still large at 18.5 percent of total government spending (IDR 1,816.7 trillion).
It is official. As of Saturday 22 June 2013, after months of uncertainty and speculation, the price of Indonesia's subsidized fuel has finally been raised. Starting from 0.00 am (midnight) on Saturday, all Indonesians have to pay a higher price of gasoline and diesel. Gasoline has been raised by 44 percent to IDR 6,500 (USD $0.66) and diesel by 22 percent to IDR 5,500 (USD $0.56) per liter. The minister of Energy and Mineral Resources, Jero Wacik, made the announcement on late Friday evening, after which the hike took effect immediately.
Despite mixed Asian stock indices because of negative news from China and Japan, certainty about the increase in the price of Indonesia’s subsidized fuel after the plenary meeting of the House of Representatives (DPR) on Monday (17/06) formed a pillar of support for Indonesia’s main stock index (IHSG) on Tuesday’s trading day (18/06). Investors took the opportunity to buy stocks, particularly Indonesia’s big cap stocks, after these had experienced significant falls last week due to profit taking actions amid an uncertain market.
Despite weakening stock indices in the United States on Friday (14/06), most Asian indices were up on Monday (17/06) and impacted positively on the main index of Indonesia (IHSG). On the other hand, market participants are still waiting for the outcome of the plenary session of Indonesia's House of Representatives (DPR) regarding the approval of the increase in the price of subsidized fuel. The market is speculating that the price increase will be approved even though a number of political parties oppose the plan.
Data released by a department of Indonesia's Ministry of Finance showed that the country's budget deficit amounted to IDR 25.9 trillion (USD $2.64 billion) on 31 May 2013. This figure is equivalent to 16.9 percent of the target that is set in the 2013 State Budget (IDR 153.3 trillion). The IDR 25.9 trillion deficit translates to 0.27 percent of Indonesia's gross domestic product (GDP). The maximum amount of deficit - as stipulated by the State Budget Law of 2013 - that is allowed to be maintained is equivalent to 1.65 percent of GDP.
Although Indonesia’s government stresses the need to relieve pressure on the state budget (by raising the price of subsidized fuel next month), it plans to allocate an additional IDR 16.1 trillion (USD $1.65 billion) to this year’s fuel subsidy budget. The additional allocation, which covers fuel, LPG and vegetable fuels, will raise government expenditure on fuel subsidies to IDR 209.9 trillion (USD $21.50 billion) from the IDR 193.8 trillion drafted in the original 2013 state budget (APBN 2013). Total energy subsidies will grow to IDR 309.9 trillion this year.
International financial services company Standard & Poor's (S&P) downgraded its outlook on Indonesia’s BB+ rating from positive to stable as the agency assessed that Indonesia's reform momentum is fading and the external profile is weakening. The decision came as a surprise as Indonesia's government had just declared to reduce its massive spending on fuel subsidies starting from next month. These subsidies were the main reason why S&P had not upgraded Indonesia's credit rating to investment grade yet.
Last week Indonesia's main stock index (IHSG) was mixed with a weakening trend. The index lost 19.9 points, equivalent to 0.40 percent of its value. During the last month, the index consolidated within the range of 4,800 and 5,030 points. Foreign funds continued to pour in and trade volume remained high although below average trade in the last three weeks. In fact, our technical indicators are showing signs that Indonesia's main stock index has become saturated.
On Friday's trading day, the Indonesia Stock Index (IHSG) started in an upward direction. However, as it felt the impact of European stock indices, that mostly opened lower, the IHSG weakened 0.32 percent to 4,978.51 points. Moreover, most other Asian indices were down (except for Hong Kong's HSI) and thus contributed to the IHSG's fall. Market participants also seem to fear the annual 'May Cycle' of the IHSG, which involves the traditional large-scale selling of IHSG stocks.
