JAKARTA Jan 7 The announcement came without
fanfare, in line with Indonesian President Joko Widodo's style,
but his decision to let petrol prices float freely is the most
significant move to stabilise Southeast Asia's largest economy
in years and shows his resolve to promote reform.
On Jan. 1, Widodo's government scrapped subsidies for
petrol, letting pump prices rise and fall in line with the cost
of crude oil.
"It took some guts," said economist Wellian Wiranto at OCBC
The subsidy reforms could be the start of more market
liberalisation, including in domestic fuel sales. This could
bring resistance from state oil company Pertamina, which would
have to compete with foreign oil firms, who so far have failed
to get much market share because of subsidies.
Widodo hasn't spelled out other plans, but some analysts
think he intends to pursue reform of Indonesia's daunting
bureaucracy and how multiple business sectors are regulated -
where vested interests might block the way.
Many citizens expect the government to protect them for the
sharp end of free-market capitalism. But Widodo's quick move on
subsidies - taking advantage of tumbling world oil prices -
shows "how serious he is about reform", Wiranto said.
Pertamina previously sold petrol at 8,500 ($0.68) rupiah per
litre. Now the government will adjust pump prices each month
based on the global oil price.
FREEING UP BILLIONS
Widodo kept subsidies for diesel, but fixed them at 1,000
rupiah per litre, so the government no longer picks up the bill
when oil prices spike.
The changes free up nearly $20 billion in 2015 for spending
on productive things such as infrastructure and education.
By itself, the moves won't spark rating agency upgrades, but
it sets a good tone for Indonesia, which has been battling
capital flight and a sinking currency because of its
Widodo's moves are "credit positive" and give the government
"more fiscal flexibility", said Atsi Sheth from Moody's
Owing to a 52 percent plunge in the price of crude oil since
mid-June, Widodo was able to make the changes while cutting
petrol prices for consumers by 10.5 percent to 7,600 rupiah a
Since Indonesia became a net oil importer in the mid-2000s,
fuel subsidies introduced by President Suharto in the 1970s have
FAR SMALLER SUBSIDY BILL
The 2015 budget presented in September by Widodo's
predecessor said fuel subsidies would cost $22 billion and be
19.8 percent of central government spending.
Now, the subsidy this year should be 83 percent less,
Finance Minister Bambang Brodjonegoro said on Monday.
Previously, Indonesia's fiscal policy was held hostage by
global oil markets.
"In good times, the oil price soared and they had to spend
money on subsidies, which resulted in a big budget deficit,
which is the opposite of what you want to happen," said Dan
Martin at Capital Economics.
"Hopefully now they'll be able to manage fiscal policy in a
much more sensible way."
Monetary policy should also get a lift. The previous policy
of making steep, one-off increases to pump prices made inflation
"Before you had a situation where inflation was capped
artificially low until - boom - they hiked fuel prices and you
had double-digit inflation," said OCBC's Wiranto.
This made things difficult for Bank Indonesia.
AGGRESSIVE RATE HIKES
"The central bank never really knew how to respond," said
Martin. "Sometimes it would raise interest rates aggressively,
other times it wouldn't."
"Now the inflation environment should be more stable and
monetary policy more stable," he added.
The true test of the new pricing policy will come when oil
prices start to rise again, said Kevin O'Rourke, a political
"At that point, public dismay with rising petrol prices will
place pressure on the government to re-introduce subsidies," he
said in a note.
Fuel prices have been a combustible issue. Protests over
hikes contributed to Suharto's fall in 1998.
For now, though, Widodo has policy flexibility without
facing opposition, thanks to cheap oil.
For policy management, "it's going to be good all round,"
(Editing by Richard Borsuk)