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There are strong indications that a hike in subsidised fuel prices is on the cards and might be announced as early as today. Allocations towards subsidies and compensation to state-owned suppliers have made up 16% of total expenditure this year, with a delay in price adjustments to necessitate additional funding (~IDR 100-200trn according to local press). In a pre-emptive move to ease strain on low-income households, an aid package worth IDR 24.2trn has been announced, consisting of a) IDR 12.4trn to direct cash assistance via monthly handouts of IDR150k till year-end; b) IDR 9.6trn for salary assistance for workers with income <IDR3.5mn/month; c) IDR 2.17trn to subsidise transport costs. As the mandate to lower 2023 fiscal deficit back to -3% of GDP kicks in and allocation to energy subsidies is cut by a third, we suspect a fuel price adjustment is baked into the math. With elections looming in early 2024, the window to undertake this politically sensitive decision is also fast narrowing.
Hinging on the scale of price adjustments, there is bound to be implications on inflation(we drew scenarios here and here). Following the pre-emptive rate hike in Aug, our base case is for BI to tighten policy by at least a further 50bp this year. During the last fuel price hikes in 2013 and 2014, benchmark rate was adjusted by 125bp (year of the taper tantrum) and 25bp respectively within three months of the hike. Currently, estimates are that subsidised Pertalite is ~35-45% below market prices, besides a similar shortfall in solar (local gasoline fuel). The significant wedge between non-subsidised and subsidised fuel is influencing consumption patterns. As of Jul22, subsidised diesel had reached 9.9mn kl i.e., two-thirds of the total quota for the year and subsidised gasoline at 16.8mn kl i.e., 73% of the quota, according to Pertamina. On a broader note, any adverse impact on the financial markets and sentiments might be temporary as a reduction in subsidies, liberalisation of fuel prices and ongoing fiscal consolidation will be viewed as prudent and judicious policy moves.
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