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Jumat, 05 Agustus 2011

Indonesia Macro View - What Will Be Done About Energy Subsidies (and When)? - Citigroup

 No crisis, no action? — Given the government’s excess cash position and the lingering debt crisis in developed economies, swelling domestic energy subsidies have so far not triggered serious concerns in the bond market. The government may thus continue to take its time in implementing subsidy reform.
 But eventually the subsidies must be managed, as they take up a growing portion of the budget — The question is how and when? Energy subsidies already exceed the central government’s capital spending budget. And even at the provincial/regional government level, capital expenditure is dwarfed by salary payments. Under the status quo, long-term growth objectives are clearly being outweighed by short-term considerations.
 From a political standpoint, we think rationing will be preferred over price hikes — Although only mild price hike scenarios have been put on the table, they may have a higher inflation impact compared to a rationing program, and thus would likely be less popular. We estimate an 11% fuel price increase would push up inflation by 1.4pps from a no-hike scenario. Meanwhile, rationing in Java-Bali would push inflation by 0.3 – 0.8 percentage points upon full implementation, depending on the width of coverage.
 In regard to the timing, we don’t think a wide-scale subsidy limitation program will be carried out until 1Q12 — The infrastructure for a coordinated wide-scale rationing program may still need months to prepare. Hence we don’t think that immediate implementation after the Eid holidays (end-August) is likely, although a rationing plan of limited scope, involving Jakarta only, is not impossible.
 Lowering our YE11 inflation forecast to 5.0%, and raising our YE12 inflation forecast to 6.2% — This is from previously 5.8% and 5.8%. Although fuel scarcities are still a risk, there hasn’t been extraordinarily high inflation in the areas of occurrence. Meanwhile we maintain our projection of a stable BI rate this year and only one 25bps hike in 2012.

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