July 31, 2018 / 5:00 AM / 14 days ago

Indonesia president pushes biodiesel plan to stop currency tanking

JAKARTA (Reuters) - Indonesia’s president called on Tuesday for the immediate implementation of a plan to widen the use of biodiesel that his economic ministers hope will cut the country’s fuel import bill by billions of dollars and halt a decline in the rupiah currency.

FILE PHOTO: Indonesian President Joko Widodo delivers a speech at Foreign Ministry office in Jakarta, Indonesia, February 12, 2018. Antara Foto/Wahyu Putro/ via REUTERS

Joko Widodo also sounded an alarm on the foreign exchange reserves of Southeast Asia’s largest economy, less than a week after he pleaded with exporters to bring home earnings they currently keep offshore to stem the slide in the rupiah.

“The country needs dollars now,” Widodo said at the opening of a cabinet meeting, before reporters were ushered out. “I don’t want to keep doing meetings without good implementation.”

Concerns about tighter U.S. monetary policy and a global trade war have put emerging market currencies under pressure.

Indonesia's central bank has spent about $12 billion of its foreign exchange reserves in recent months and hiked policy interest rates by 100 basis points to defend the rupiah IDR=ID, which has lost about 6 percent of its value against the dollar this year.

Cabinet ministers have met at least six times since the start of July to tackle concerns over trade and the rupiah, said a senior government official, who asked not to be named because of the sensitivity of the issue.

“Like any other central bank in the world, Bank Indonesia can only slow things down and smooth things out, but cannot stop underlying trends driven by fundamentals,” the official said.

One key remedy the government sees as a way to cut the current account deficit - which the central bank estimated would widen by $8 billion this year - is a plan to substitute fuel imports with palm oil-based biodiesel by making it mandatory for all diesel vehicles, including locomotive engines and heavy equipment.

The present rules, intended to boost consumption of palm-oil-based biodiesel, apply only to subsidized diesel, which some users and vehicles are not allowed to buy.

Indonesia is the world’s top producer of palm oil, the raw ingredient for fatty acid methyl ester (FAME), which can be used to make biodiesel.

“FASTER THAN BOOSTING EXPORTS”

Vegetable oil prices are currently low in relation to fossil fuel prices, which have risen sharply, so government planners see sense in consuming more palm oil domestically to curb imports of diesel.

Expanding the so-called B20 biodiesel program could save Indonesia $2-4 billion in import costs a year, the official said. Industry Minister Airlangga Hartarto told reporters this week the saving could be as much as $5 billion.

“In the short term, this would be a faster solution compared to trying to boost exports,” said Josua Pardede, an economist at Bank Permata in Jakarta. “Replacing imports would be one alternative to maintain the current account deficit at a healthy level.”

A presidential regulation on expanding B20 had been completed and it would start no later than next month, said Chief Economic Minister Darmin Nasution.

Along with low prices, Indonesian palm oil exporters are already facing pressure Europe due to concerns over environmental damage related to deforestation, so more domestic consumption will be welcome to plantation companies.

However, while biodiesel can cut fuel costs and reduce emissions, some varieties need special handling and equipment as the fuel has a solvent effect, corroding engine seals and gasket materials, and it can solidify in the cold.

Indonesia’s auto industries group, GAIKINDO, has said stepping up biodiesel blends can increase fuel consumption and could cause engines to overheat.

Kyatmaja Lookman, deputy chairman of the Indonesian Trucking Association, said fuel consumption could increase by 2 percent.

“The question is, when our drivers have to spend more on fuel, their welfare is also declining,” he told reporters. “Who will be responsible for this 2 percent increase? The transportation business margin is only around 6-8 percent.”

Additional reporting by Tabita Diela and Bernadette Christina Munthe; Writing by John Chalmers and Fransiska Nangoy; Editing by Neil Fullick

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