| JAKARTA, April 2
JAKARTA, April 2 Indonesia's Golkar Party has
emerged from a policy fight over whether to raise subsidised
fuel prices less tainted than its main coalition partner, the
Democrat Party, and voters are likely to take note ahead of
elections in 2014.
A parliamentary vote on Friday to delay raising fuel prices
by 33 percent and instead grant the government authority under
certain conditions to raise prices later saddles President
Susilo Bambang Yudhoyono's Democrat Party with an unpopular
decision down the line.
It could keep inflation in check in the short term, but will
increase the burden on government coffers and undermine efforts
to rein in a budget deficit, pressuring bond prices, according
For voters, though, it all starts with the politics.
As police fired water cannon and tear gas grenades to keep
protesters at bay outside parliament, Golkar told the public it
had switched to opposing a fuel price rise. Then, inside
parliament, it voted for one on precisely the terms it
"Golkar and the Prosperous Justice Party are trying to
secure their electoral fortunes and don't want to get mud
splashed on them from this very unpopular policy. That is why
they leave it to the government to decide on this hike," said
Dodi Ambardi, executive director of Indonesia's Survey
"In terms of political moves, Golkar seemed the most cunning
to come out of this mess with the message that they are on
people's side," he said. "It's amazing how the elections are
still two years away but the battle has begun."
Golkar, the political machine of former autocratic leader
Suharto, has the second largest number of seats in parliament
and support from businessmen, civil servants and rural farmers,
making it a contender to win a wide-open election.
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Yudhoyono must step down in 2014 after two terms and
Golkar's leader, the tycoon Aburizal Bakrie, would have a strong
chance to replace him if he decides to run.
Yudhoyono won credit in December and January when Fitch and
Moody's ratings agencies upgraded Southeast Asia's largest
economy to investment status, though his popularity has been hit
by allegations of corruption within his party and he may have
misjudged the likely reaction to a fuel price hike.
In a national address on Saturday, he said a fuel price rise
was necessary to promote a healthy fiscal and state budget and
save the economy, but he acknowledged other factors.
"Even I feel that everything is related to political
interests, including the politics ahead of the election in
2014," he said.
The agencies cited a stable policy framework, a big domestic
market in the world's fourth largest country by population and
sustained growth above 6 percent that made Indonesia one of the
hottest emerging markets in the world for investors.
Even so, the question of what to do about fuel prices that
are currently the lowest in Asia lurked in the background.
The government repeatedly postponed making a decision on an
issue that touched bond prices, inflation, infrastructure
spending and investor confidence.
In the short term, a decision not to raise prices on the
April 1 deadline will put pressure on the bond market because a
higher fiscal deficit will mean higher bond issuance that will
in turn lead to inv estor ou tflows, said Gundy Cahyadi, an
economist at OCBC in Singapore.
"The BI (Bank Indonesia) rate is likely to stay on hold for
now, but it's not going to make investors attracted to the bond
market because who knows when the fuel price hike will kick in,"
Cahyadi said. Other economists echoed that view.
Bank of America Merrill Lynch said in a report that
parliament's decision could undermine efforts to keep the budget
deficit at a tolerable level. It could add 50 trillion rupiah in
fuel subsidies if the government does not keep consumption with
in its quota, the report said.
"The fuel subsidy could balloon to about 205 trillion rupiah
in 2012 (versus 165.2 trillion rupiah in 2011) on higher
consumption and oil prices," it said.
"This could put the budget deficit closer to 3.2 percent of
GDP, higher than the revised estimates of 2.2 percent of GDP had
the fuel subsidy cut materialized," it said.
One crucial audience for the fuel subsidy debate is S&P,
whose sovereign ratings team visited Indonesia last week. On
Monday, S&P said it retained a "positive outlook" in the wake of
the fuel decision.
It said it may raise the country's sovereign rating if
inflation pressures diminish and external debt declines, but it
added a caveat.
"A stalling of reforms or the absence of timely and adequate
policy responses to renewed fiscal or external pressures would
result in the rating stabilizing or weakening," said associate
director of sovereign and international public finance ratings
Parliament's decision postpones any fuel price hike, but
opinions differ as to when one could be implemented.
Under the legislation voted on Saturday, the government has
authority to raise prices only if global prices are 15 percent
higher than the government's $105 a barrel forecast for the
Indonesian Crude Price, a basket of crudes, over six months.
That reduces the prospect of a rise this year only if the
six-month limit is not applied retrospectively.
If the ICP is $123 in April and May, it will be sufficient
to trigger a fuel price rise, Energy Minister Jero Wacik told
reporters on Monday.
For many ordinary people, the protracted debate has been
lose-lose. The prospect of a petrol pump price rise is
unpalatable and the cost of living ha s already started to rise
in anticipation of higher fuel costs.
"When rumours of a fuel price hike started to spread, food
prices immediately increased," said Putra Syahputra 30, a public
"When the fuel price hike was delayed, did we see other
prices go down? No."
(Reporting by Olivia Rondonuwu, Adriana Nina Kusuma and Reza
Thaher in JAKARTA and Emily Kaiser in SINGAPORE; Editing by Nick