October 17, 2014 / 3:39 AM / in 3 years

Exclusive: Indonesia's new president plans steep fuel price rises next month

JAKARTA (Reuters) - Indonesia’s President-elect Joko Widodo plans to raise subsidised gasoline and diesel prices by around 50 percent next month in a bid to bring down the budget deficit in Southeast Asia’s largest economy, an adviser told Reuters on Friday.

Fuel tank drivers wait to load their cargo at a state-owned Pertamina fuel depot in Jakarta in this September 9, 2014 file photo. REUTERS/Darren Whiteside/File

The new government will be taking a highly unpopular step, but some worries for the minority coalition’s future were eased by opposition leader Prabowo Subianto offering qualified support for Widodo’s administration at a joint news conference following the rivals’ first meeting since a disputed election in July.

Due to be sworn in on Monday, Widodo has to urgently address Indonesia’s biggest fiscal problem - a $23 billion fuel subsidy bill that is the main driver behind the country’s twin budget and current account deficits.

The adviser said the incoming president plans to raise the price of gasoline by 46 percent, and diesel by 55 percent, possibly as early as Nov. 1, in a move that will save the government nearly $13 billion next year.

“It’s safe to say they are likely to do it within the first two weeks of taking office,” said the adviser, who requested anonymity because he was not authorized to speak to the media.

Raising fuel prices is a sensitive issue that typically sparks protests and contributed to the downfall of long-serving autocrat and then president Suharto in 1998.

Widodo could still amend his plan, the aide said, but whereas the size of the increases will be criticized by opposition parties, the government does not need parliamentary approval to raise fuel prices.

The former Jakarta governor will need support for future tricky decisions, however, and he has sought to mend ties Prabowo after a disputed election that was the closest in Indonesia’s history.

Their meeting on Friday appeared to ease tensions, though it was unclear whether they discussed a hike in fuel prices.

“Our objectives are the same ... everything will be done for the good of the nation,” Widodo said.

Prabowo, a former general, congratulated Widodo and saluted him once the press conference was over.

“I conveyed that the party I lead, my supporters, I will ask them to support Joko Widodo and the government he will lead,” Prabowo said. “When there are things that we judge to not be for the benefit of the people...we will not hesitate to criticize.”

The prospect of a fuel price hike to bring down a worrying fiscal deficit, and Prabowo’s soothing words gave heart to investors in Indonesian assets.

The stock market rose around 1 percent, as did the rupiah currency, while 10-year government bond yields eased.

PROTECTING THE POOR

Widodo currently plans to raise the price of both gasoline and diesel by 3,000 rupiah ($0.25) per liter by November, the advisor said. Indonesian fuel prices are now among the cheapest in the region, with gasoline costing 6,500 rupiah a liter, and diesel costing 5,500 rupiah.

“We would probably oppose it on the grounds it would be too much of a shock to the system,” Hashim Djojohadikusumo, a top aide and brother of Prabowo told Reuters last week.

He said opposition lawmakers would likely favor a smaller increase in pump prices, of around 1,000-1,500 rupiah.

The government is expected to save 156 trillion rupiah ($12.76 billion) next year in fuel subsidy costs, the adviser said. In the 2015 budget, fuel and gas subsidies make up 13.5 percent of government spending.

Widodo’s advisers say the money saved would be diverted to spending on infrastructure, agriculture, education, and health projects.

To offset the higher fuel prices, Widodo plans to provide the poorest families with 300,000 rupiah per quarter until the first quarter of 2016, the adviser said.

A further fuel price will be considered in the fourth quarter of 2015, the adviser added.

The 2014 budget deficit had been targeted at 2.4 percent of gross domestic product, but it is in danger of busting a budget law setting the limit at 3 percent because of a shortfall in tax revenues and the slowest economic growth in five years.

A fuel price hike of 3,000 rupiah in November would save the government 21 trillion rupiah in the last two months of this year, the current Finance Minister, Chatib Basri, said.

The planned fuel price hike would add an additional 3-3.5 percentage points to inflation this year, and the inflationary pressures would last around three months, said the deputy central bank governor Perry Warjiyo.

The current estimate for 2014 inflation is 5.3 percent.

The fuel price hike will help ease the current account deficit to below 2.9 percent of gross domestic product in 2015 from a projected 3.2 percent this year.

(1 US dollar = 12,165 rupiah)

Additional reporting by Michael Taylor, Fransiska Nangoy and Gayatri Suroyo in Jakarta; Writing by Randy Fabi; Editing by Simon Cameron-Moore

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