By Chris Wright
Indonesia is not an obvious name to benefit from the low oil price: it is, after all, a significant producer of oil, at one time the biggest in southeast Asia and a member of OPEC, and until recently it had ambitions to restore flagging production to a million barrels a day (it stands at about 850,000 right now). But it benefits because despite that scale of production, Indonesia’s rapid growth makes it a net importer of oil, and because historically it has subsidised the fuel costs of its 250 million-strong population, placing a heavy burden on the state.
The reduction in oil prices is only part of the formula for understanding why Indonesia might be appealing to investors. Indonesia, like India, had landmark elections this year, bringing in a new leader, Joko Widodo, promising zest and reform (see Is This Indonesia’s Obama Moment?) Widodo promised a great deal, but probably the most daring thing he has done so far is to tackle the thorny issue of fuel subsidies.
“Politically, fuel subsidies are very difficult to remove,” says Ali Yahdin Saugi, head of Indonesian equities at BNP Paribas Investment Management, noting that the subsidy has been in place since the 1970s. So Widodo decided to do it very early in his term. In November, the price for gasoline and diesel was increased, which Deutsche Bank said would represent a Rp120 trillion ($9.8 billion) saving in the 2015 budget. “The hike is potentially a game changer for the math on subsidies (which will be cut back to levels last seen in 2010) as well as the current account,” Deutsche said that day. “We estimate the impact on the latter to be as much as 1.5% of GDP, which would significantly reduce the vulnerability for Indonesia.” Saugi at BNP says that the price increase was 33%, and that the plan is to remove the subsidy completely.”It is really giving the sense that the new government is reform-minded,” he says.
Clearly, if the oil price internationally comes down at the same time that the subsidized fuel price has been raised, Indonesia comes closer still to eliminating subsidy costs completely, which means it can do something else with the money. “The new government now has more budget to play with and can invest it in something more constructive,” Saugi says. It’s not all good – there will be a clear impact on inflation, perhaps increasing it 2-2.5%, and the central bank, Bank Indonesia, has already raised rates by 25 basis points to compensate – and naturally anything that costs the consumer more must impact that consumer’s ability to spend. But Saugi considers this “short term pain for long term gain,” and hopes it will prompt Standard & Poor’s to become the third and final rating agency to upgrade the country to ivnestment grade, making it more popular still with investors and reducing national (and big corporate) borrowing costs.Read more