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Indonesia’s twin deficits threatens subsidized oil prices

 

Today’s subsidy distortions are higher than pre- global crisis.

According to DBS, the fiscal deficit and current account deficit are key challenges for the government. "Although the USD price of crude oil has run sideways over the past year, a weaker rupiah and rising fuel consumption has strained the budget. Fuel price hikes planned for early-2012 went unimplemented and energy subsidies cost IDR 100trn (50%) more than planned for in the budget. "

Here's more:

To measure the extent of pressure on the government, we calculate the ratio of crude oil price in IDR terms to the (subsidized) street price of a litre of fuel. A larger ratio implies higher subsidies and pressure on the government to raise prices.

By this measure, today’s distortion from subsidies is even higher than it was during the oil price spike in 2008. These and other economic stimulus have pushed the current account deficit to 2.5% of GDP in 2012, raising USD funding risks.

As such, pressure for a fuel price hike has been mounting. However, as shown last year, fuel price increases are politically difficult to implement. We suspect currentprice pressures are not great enough to force an adjustment on the near-term.

Stress testing the budget assumptions. Budget assumptions for 2013 are optimistic. In particular, the assumptions for subsidized fuel consumption and oil price are on the low side.

Subsidized fuel consumption reached 46mn kiloliters in 2012 but the budget assumes that this figure stays unchanged this year. If, however, fuel usage follows real GDP growth, one would expect subsidized fuel demand to growth by around 6% a year, implying subsidized fuel usage of 48-49mn kiloliters for 2013.



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