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Fears escalate for subsidized fuel price hike in Indonesia


Rupiah has weakened ~6% vs US dollar.

According to DBS, the pressure to hike subsidized fuel prices are mounting. Over the course of the last 12 months, the rupiah has weakened by about 6% against the greenback.

This implies that oil imports are now that much more expensive even though the international price of oil in USD terms has actually gone sideways.

Here's more from DBS:

To measure the extent of pressure on the government, we calculated the ratio between crude oil price in IDR terms to the subsidized price of fuel (gasoline 88 used as a benchmark). 

A larger ratio implies higher pressure on the government to raise prices. By this measure, the distortion from subsidies is even higher than it was during the oil price spike in 2008. At that time, the authorities temporarily increased the subsidized fuel price by 33% to IDR 6,000/liter in May before bringing it back to do IDR 4,500/liter in January 2009.

Rising fuel prices also worsens the current account as Indonesia remains a net oil importer. By raising fuel prices, the authorities can reduce expenditure and engineer a temporary slowdown in domestic demand to ease pressure on the trade balance.

That said, it remains politically difficult to raise subsidized fuel as was seen early last year when a planned fuel price hike was aborted in the last minute. Reforms on fuel prices are likely to come only if oil prices continue to mount or if the trade balance remains in a sizable deficit position in the coming months.

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