Economy to benefit from fuel price rises: Analysts
Economy to benefit from fuel price rises: Analysts
Ahmad Pathoni, Agence France-Presse/Jakarta
Indonesia's bold decision to more than double fuel prices will strengthen the economy in the long term even though it is expected to trigger higher inflation and slow growth this year, analysts said.
"It will have a positive impact in the longer term. Initial positive effects include a stronger rupiah," said Muhammad Chatib Basri, an economist at the University of Indonesia.
Chatib said higher fuel prices would result in reduced consumption and therefore trigger less demand for imports. "This will in turn reduce demand for the dollar and oil smuggling," he told AFP.
On Oct. 1, the government raised fuel prices by an average of 126 percent to cut fuel subsidies that were devouring one-fifth of the annual budget.
The decision drew limited protests despite earlier threats by activists to mobilize thousands of demonstrators.
As global oil prices hover near record highs, Indonesia has been forced to slash the subsidies, which parliament has now capped at Rp 89.2 trillion (US$8.7 billion) for the year.
David Chang, research director at Kresna Securities, said the fuel price rise was relieving budget pressure caused by ballooning subsidies, and boosting investor confidence.
"I would say that in the longer term the fuel price hike will probably strengthen the economy even though in the short term inflation and interest rates will rise," he said.
He said bombings on the resort island of Bali, which killed 20 people just hours after the price rise was announced, failed to dampen the stock market or weaken the rupiah because investors had more confidence in Indonesia.
"Monday's net positive trading tone was a testimony to the market's determination to reward the Indonesian government for taking bold steps to address the burden of fuel subsidies," Singapore's DBS Bank said in a research note three days after the blasts.
David Cohen, a Singapore-based regional economist with research house Action Economics, hailed the decision to raise fuel prices as "a prudent move".
"It promotes more efficient operation of the economy as consumers and businesses face the true world price of oil in their consumption and production decisions," said Cohen.
"Short term, there is a drag from the higher fuel prices on consumers' budgets, potentially slowing down economic growth in the short term."
Cohen, however, said the drag would only be marginal.
Fauzi Ichsan, an economist with Standard Chartered Bank, said the government should use its savings on subsidies to build infrastructure to attract investors.
He said the hikes would severely hit people's purchasing power, causing slower economic growth which has so far been driven mostly by consumption.
The government's program to cushion the impact on the poor by providing cash payouts of Rp 100,000 per month should be well- targeted to prevent unrest, he said.