ECONOMIC UPDATE - What to Expect - Expensive Petroleum

 

 

Tackling the swelling energy subsidy

If Harry Potter casts expecto patronum to tackle Dementor, the government casts expensive petroleum to tackle the swelling energy subsidies. On September 3^rd 2022, finally the government has raised the subsidized fuel prices by around 30%. Pertalite (RON 90) increased from Rp7,650 to Rp10,000 per liter. Solar (CN 48) increased from Rp5,150 to Rp6,800 per liter. This is the first in eight years for the government to increase the subsidized fuel prices. On the other hand, the prices of non-subsidized fuels have been cut instead as mentioned below. The fuel price hike is the government’s last option to reduce the ballooning energy subsidies due to the higher global oil price.

 

Reasons behind the price hike

Several economic indicators in 2022 State Budget, especially rupiah and crude oil price, surpassed beyond what was assumed. If the fuel prices were not raised, the energy subsidies could reach Rp698 tn (22.5% of total government expenditure) in YE 2022 from initially it was allocated at Rp152 tn (4.89% of total government expenditure). Before the fuel price hikes, the government had actually tripled the subsidy to Rp520 tn for the fuels, electricity, and 3 kg LPG, but it turned out still insufficient. Besides, the Pertalite quota will run out as the consumption is projected to reach 28 million kiloliters this year while the quota is only 23.1 million kiloliters. Without the higher price to avoid scarcity, it is predicted that the Pertalite supply will only last until Sep-22. All in all, the government has to go back to the mandate of fiscal deficit below 3% of GDP but still manage other priority budgets on Exhibit 2.

 

Mitigate the risk with social assistance 

The government claimed that the flow of subsidies to the public was not well targeted, about 70% of subsidies were benefiting middle and upper classes. To cope up with the detrimental effect, the government decided to allocate an additional Rp24.2 tn as social assistance. The government would provide Rp150,000 of cash handouts for 20.6 million poor families totaling Rp12.4 tn, coming from the reallocation of energy subsidies, until YE 2022. The government will also spend Rp9.6 tn on salary assistance for 16 million low paid workers and Rp2.17 tn for transportation cost subsidies, particularly for motorcycle taxi drivers and fishermen.

 

The impact on inflation

The high energy subsidies had restrained the inflation rate until Aug-22. However, with the current condition, we expect inflation may jump in Sep-22 likely to surpass 6% YoY due to the significant jump of the fuel price. The impact could more likely to be higher due to its indirect effects to other related basket of goods and services such as transportation and restaurant provision. We estimate the inflation could achieve 6.74% YoY where previously we expected a 4.84% YoY of inflation for YE 2022. The Ministry of Finance (MoF) estimates the inflation will be at range of 6.6-6.8% for YE 2022 due to the fuel price hikes. Ahead, we also revised up the inflation for YE 2023 to 4.42% YoY from 3.25% YoY earlier assuming the global oil price is going to normalize in 2023.