Print

Mail

wiki links

Indonesia's subsidies must go: analysts

Indonesia must cut its expensive fuel subsidies and raise interest rates in the face of skyrocketing oil prices, which triggered a plunge in the rupiah and spooked investors over the past week, analysts said.

New York light sweet crude briefly hit an all-time high of US$68 a barrel on Thursday before retreating to US$66.13 the next day on the diminishing threat of Hurricane Katrina in the Gulf of Mexico.

But market observers believe the pullback is only temporary and that it is only a matter of time before prices gush past US$70 a barrel, after more than doubling since the end of 2003 when prices hovered near US$33.

Surging global oil prices have hammered Indonesia's rupiah as the government snaps up the greenback to pay for ever-pricier oil imports, swamping the market with rupiah.

The local currency closed Friday at 10,390 to 10,400 to the dollar after skirting 10,450 to 10,460, its weakest rate since January 2002. Aggressive intervention by the central Bank Indonesia earlier in the week failed to stop the currency plunging beyond the psychologically important 10,000 level.

Standard Chartered economist Fauzi Ichsan described the depreciation as "very serious," noting it took almost nine months for the rupiah to fall from 9,000 to 10,000 but only three days to drop further to 10,300.

"With such a plunge of the rupiah the issue has become one of confidence that the government and Bank Indonesia would not be able to control the rupiah and manage the fiscal situation," he said.

The government is further being squeezed as it forks out for spiralling fuel subsidies to consumers, with President Susilo Bambang Yudhoyono making the strongest indication yet last week that he may hike domestic fuel prices.

Despite being a member of the Organization of Petroleum Exporting Countries, Indonesia's underfunded and ageing energy sector is unable to supply fuel needed to meet domestic demand, meaning it has become a net importer.

The International Monetary Fund said last week Indonesia's economy was on a "strong footing" but that authorities had to slice fuel subsidies and address inflation.

Hiking fuel prices poses serious political risk in oil-producing countries with poverty-stricken populations where people see subsidized fuel as a right.

The last price rise in Indonesia in March sparked nationwide protests. These are likely to be repeated if the government raises prices, but analysts say a hike is crucial for the health of Southeast Asia's largest economy.

"This will create tension among the public and there will be demonstrations, strikes and so on, but we cannot avoid the increased price in the domestic market," said Didik Rachbini, an economist as the Institute for Development, Economy and Finance.

Jittery investors sold shares across all sectors in the past week, with the market closing Friday down 39.079 points or 3.6 percent at 1,048.874. The key index has shed about 12 percent of its value since Aug. 10.

Standard Chartered's Ichsan said that in the short term, the government needed to take four measures quickly, including the fuel price hike "to signal to the market that it is still committed to fiscal prudence."

As well, it needed to get its suspended privatization program back on track, raise short-term interest rates from 8.75 percent to more than 10 percent, and reverse a bank regulation introduced two months ago aiming to limit hot money which has discouraged too strongly short-term portfolio investment.

The central bank signalled on Thursday that it planned to raise rates next month but did not indicate by how much.

"These four measures have to be introduced as a package ... The government and Bank Indonesia have to show to the market, to the people, that they are in charge, that they know what they're doing," Ichsan said.

A longer term boost in capital inflows is meanwhile being hampered by legal uncertainty surrounding corruption, poor implementation of regional autonomy, labor rigidity and poor infrastructure, the economist warned.

Citigroup economist Anton Gunawan also said interest rates needed to be raised further. The central bank hiked the reference rate from 8.50 to 8.75 percent earlier this month, and last Wednesday raised a seven-day deposit rate.

"The key to this depreciation of the rupiah is that Bank Indonesia has been very late in responding to the increase in interest rates," he said, adding that the reference rate must be raised by at least 50 basis points more.
This story has been viewed 1453 times.