The government always has a hard consideration when it wants to raise the price of fuel as well as when it will cut subsidies for this energy source. As a commodity that is used by almost all people, political effects are always considered, especially in the election year. Meanwhile, the policy of maintaining subsidies or prices actually adds to the economic turmoil, including hitting rupiah resistance.
World crude oil prices have risen above the Indonesian Crude Price (ICP) assumption of US$ 48 per barrel in the 2018 State Budget (APBN). Earlier this month, Brent oil hit US$ 85 per barrel, even though it later declined. Last Friday, it remained at a high level of US$ 76.78 per barrel.
The government has actually predicted this situation. Last March, Sri Mulyani said the realisation of ICP and the rupiah exchange rate against the US dollar would exceed this year’s state budget assumption. On the one hand, changes in ICP and the rupiah exchange rate would increase state revenue. On the other hand, these changes add to the burden of energy subsidies.
Therefore, the government at that time decided not to raise the price of subsidized fuel and electricity in order to maintain people’s purchasing power. “So that it becomes the economic driver, along with investment and exports,” Sri Mulyani said.
The prediction of the former World Bank Managing Director was even further proven in reality. The price of world crude oil is currently the highest since the end of 2014, when it hit US$ 99.08 per barrel. This year, the weakening of the rupiah, though not the worst, became one of the top five that was hardest hit by the US dollar at -12.8 percent after Turkey, Brazil, Russia, and India.
In early September, rupee and rupiah exchange rates were leading the weakening of the Asian currency. From January to September 2018, the Indian currency weakened more than 10 percent, the deepest compared to other Asian currencies. The Indonesian currency depreciated by more than 9 percent, while the Japanese yen became the only major Asian currency that managed to strengthen against the US dollar. (See the chart below).
To overcome these two pressures – a surge in oil prices and a fall in the rupiah – Institute for Development of Economics and Finance (Indef) Program Director Berly Martawardaya advised the government to increase fuel prices. With this policy, people will save more on using fuels for their vehicles. In the end, fuel imports will decrease, helping to improve the current account deficit (CAD) in the short term.
Many economists see that the CAD has become a scourge that continues to haunt Indonesia’s economy since it occurred in 2004. Oil and gas sector was the biggest contributor to the deficit. Last month, the value of oil and gas exports hit US$ 1.21 billion, while imports were US$ 2.28 billion. As a result, the national oil and gas trade balance deficit reached US$ 1.07 billion.
In January-September, the oil and gas balance deficit was US$ 9.38 billion. This figure soared 59.5 percent from US$ 5.88 billion in the previous year. (See the chart below).
Therefore, Berly sees the importance of adjusting fuel prices to the development of the world market. Moreover, the price of fuel with its economic price has been far adrift, so it needs to be anticipated. “For economists, we believe prices should rise. The price is already like that, don't cover it,” he told Katadata.co.id, Friday (10/26).
Berly also sees that the government needs to reduce fuel subsidies. Thus, the state budget can be maximized for other community needs, such as the health sector. “In principle, subsidies should not be distributed to goods, but to poor people. If the subsidy is allocated to goods, the possibility of not being on target is very high. Moreover, fuel is consumed by many people,” he said.
Chatib Basri also said the same thing. According to the former Minister of Finance in the era of President Susilo Bambang Yudhoyono, the weakening of the rupiah was not much different from what happened in 2013. The rupiah became vulnerable because the Indonesian economy was still burdened with the current account deficit, where one of its biggest sources is oil and gas.
He also advised President Joko Widodo’s administration to overcome it in the short term by raising the fuel prices. This step is important because there is fuel price disparity in the country and abroad that is too far. As a result, there is an opportunity for smuggling so that the volume of oil imports continues to increase.
Referring to several other countries, the price of fuel in Indonesia is indeed the cheapest. Based on data from Globalpetrolprice, the price in Indonesia is US$ 0.7 per litre, equivalent to Rp 10,500 per liter with an exchange rate of Rp 15,000 per dollar. It is the second cheapest below Rp 7,950 per liter in Malaysia. Maeanwhile, Singapore is the country with the most expensive fuel prices in Southeast Asia. (See the chart below).
Founder of Reforminer Institute Pri Agung Rakhmanto also said the same thing. If it is viewed from an economic perspective, the price of premium and diesel fuels should be adjusted by mid-2016. This is because there has been a difference in fuel prices set by the government with its economic price. Up to now, the premium price is still at Rp 6,450 per litre and diesel at Rp 5,150 per litre.
From a political perspective, Pri said the government would probably refrain from raising fuel prices. “It is too late to raise the fuel price now. The 2018 fiscal year is almost over, the elections are also getting closer in April 2019,” he said.
A reliable source within the government told Katadata.co.id that there was a heated debate between those who prioritise political aspects and those who support structural reforms by reducing subsidies. For those who prioritise political aspects, the increase in fuel prices is feared to trigger inflation and then weaken the people’s purchasing power. In the end, people’s perception of the government decreased.
If this happens, it will be bad for Joko Widodo (Jokowi) who will compete in the 2019 presidential election. Although far above Prabowo Subianto, Jokowi’s electability is not really solid. A number of surveys show the level of electability of the former Jakarta Governor was only 52-58 percent. If referring to the 2009 presidential election, the electability must be above 60 percent like President Susilo Bambang Yudhoyono (SBY).
This is not the first time the government has considered these things. When oil prices hit US$ 108.62 per barrel in 2014, Susilo Bambang Yudhoyono (SBY) chose not to raise fuel prices even though at the time his government had entered a transition period. SBY defended his decision because according to him the responsibility could be borne by the new government.
Meanwhile, those who support structural reforms are asking for rising oil prices and subsidy cuts. The move is considered effective to reduce the current account deficit. Market participants will respond positively so that the rupiah will strengthen and the stock exchange also flourishes.
In addition, the political impact of rising fuel prices will be more easily handled in the coming months. This is different when facing a weak rupiah because, in addition to internal factors, there are many external causes that will also determine, such as the Fed's plan to hoist interest rates, the US-China trade war, and threat of rising oil prices.
The difference in views reached its peak when the government was not clear in announcing the increase of premium fuel prices. On Wednesday afternoon (10/10), Energy and Mineral Resources Minister Ignasius Jonan announced price increase for premium fuel on the sidelines of the IMF-World Bank annual meeting in Bali. The premium prices for the regions of Java, Madura and Bali (Jamali) were raised to Rp 7,000 per litre from Rp 6,550 per litre and Rp 6,900 per litre from Rp 6,450 per litre for areas outside Jamali.
However, about half an hour later, the Energy and Mineral Resources Ministry Spokesman Agung Pribadi announced the cancellation of the fuel price increase. According to him, the cancellation was a direct order from President Joko Widodo. “To be delayed and re-discussed while waiting for Pertamina’s readiness,” he said.
There has been no change until now. He said a number of things will happen if the fuel does not rise. First, the difference between the price of fuel and the economic price will be even greater. Second, the state budget fiscal deficit will widen. Third, Pertamina’s financial burden will increase.
Fourth, negative sentiment towards the rupiah exchange rate. Fifth, fuel consumption will be higher due to fixed prices, thereby increasing fuel imports and ultimately increasing the oil and gas balance deficit. “It is also related to the weakening of the rupiah exchange rate,” he said.
As a result, Pribadi concluded that if the government eventually increases the price of fuel, it should be accompanied by two efforts. The first is to help the purchasing power of the most affected people and control inflation related to the increase in prices of other goods.
Second is the anticipation of the embargo policy from the US President Donald Trump against Iran next November. The policy could make oil prices soar. Some global analysts even predicted that oil prices could breach US$ 100 per barrel, even though the IMF had predicted the opposite.
He estimates the government could still bear the fiscal burden for this year if oil prices move in the range of US$ 80-85 per barrel. “The conditions are different for 2019 because the government will use the new state budget,” he said.
Now, the decision is in the hands of the government. Will they prioritise populist policies or increase fuel prices to overcome the current account deficit and strengthen the rupiah?
In a column in the Kompas daily newspaper on Friday, Chatib Basri closed his article about how difficult the economy will be in the coming years, including the rupiah. He again quoted Jokowi’s “Winter” speech at the IMF-World Bank meeting in Bali. According to him, the coming years do not only store winter, but it even has the potential to cause snowstorms. Therefore, “We need to be wise and dare to choose between difficult choices. We cannot continue to come up with populist policies.”