Fuel price rise encouraging: S&P

Fuel price rise encouraging: S&P

Claire Leow, Bloomberg/Jakarta

Indonesia's decision to cut fuel subsidies and raise fuel prices is an "encouraging move" that will relieve pressure on the state budget, rating company Standard & Poor's said on Monday in an e- mailed statement.

"The move should restore investor confidence somewhat," the statement said. "Besides the fiscal considerations, the fuel subsidy cut was also necessary to relieve some pressure on the beleaguered rupiah."

On Oct. 1, the government almost tripled kerosene prices and more than doubled diesel tariffs to cap energy subsidies that threatened to widen the budget deficit from Rp 24.9 trillion (US$2.4 billion), or about 0.9 percent of the country's gross domestic product. Premium gasoline will cost 88 percent more, higher than economists had forecast.

The subsidies were artificially propping up demand for fuel, while record crude oil prices were forcing importers to buy more dollars to pay for the commodity. The rupiah has declined 9.6 percent this year, reducing the government's ability to service and repay its estimated $70 billion of foreign debt.

"With the subsidy bill threatening to rise to more than 5 percent of gross domestic product this year, the fuel-price increase was necessary to enable the authorities to limit the fiscal deficit," Standard & Poor's said.

The rupiah gained 0.4 percent to 10,250 a dollar at noon on the first trading day since the fuel price increase.

The Indonesian government now needs to take concrete steps to ensure more fuel supplies to prevent future problems, the rating company said.

"Aside from cutting subsidies, boosting Indonesia's domestic oil production has to be part of the solution to alleviate the associated fiscal and external balance problems," it said. "This ties in with the need to improve the general business environment, which holds the key to more investment."

On Sept. 17, ExxonMobil Corp. agreed to develop Indonesia's $2.6 billion Cepu oil field, a breakthrough in a four-year dispute with the state oil company over how to exploit the nation's biggest untapped deposit.

The standoff between state oil and gas firm PT Pertamina and ExxonMobil, the world's biggest publicly traded oil company, has contributed to Indonesia's inability to meet rising fuel demand in Southeast Asia's only member of the Organization of Petroleum Exporting Countries.

The nation's decline in oil output has averaged more than 5 percent annually during the last five years.