Higher oil prices pose big threat: KPEN

Higher oil prices pose big threat: KPEN

Rendi A. Witular and Leony Aurora, The Jakarta Post, Jakarta

The government is putting its hard-gained fiscal stability, and
in turn the economy, at risk if it insists on staying with the
massive fuel subsidy, according to the influential National
Economic Recovery Committee (KPEN).

With the fuel problem at home exacerbated by constant threats
of a weaker rupiah, higher inflation and rising interest rates,
there is some real concern among foreign investors about the
country's overall economic stability, KPEN head Sofjan Wanandi
said on Wednesday.

"A higher fuel subsidy expenditure will eventually disrupt the
country's state budget and affect the currently stable macro-
economic condition. Because of that, foreign investors are now
reassessing their stance toward us," said Sofjan.

The government is in dire need of foreign investment to help
achieve economic growth of 6.5 percent this year and reduce the
nation's high unemployment by up to 3 million people.

He said that there was no other option for the government than
to reduce the fuel subsidy via raising the domestic fuel prices
to keep the state budget sustainable and keep other macro-
economic indicators in check.

"We have never thought that oil prices would soar so high to
the point that they can severely affect the country's economy.
Should there be no immediate action taken by the government, we
may end up in another economic crisis," Sofjan warned.

The government has set the fuel subsidy at Rp 76.5 trillion
(US$7.88 billion) in this year's state budget, which assumes a
crude oil price of $45 per barrel, an exchange rate of Rp 9,300
against the U.S. dollar and fuel consumption at 59.6 million
kiloliters.

However, with the oil prices now hovering at about $62 per
barrel, rupiah rates at above Rp 9,750 and fuel consumption
estimated to soar by 10 percent more than the allocated quota,
the government may have to spend Rp 135 trillion, or more, to
finance the fuel subsidy.

With such a huge unexpected expenditure, concerns are rife
that the country's already over-stretched budgetary position may
deteriorate even further, forcing the government to reduce its
spending allocations on certain crucial programs, such as those
for business infrastructure, education, health and other crucial
needs.

Sofjan said that based on the KPEN calculation, the state
budget can no longer be sustained if the government refuses to
cut the subsidy, with predictions already rife that the oil
prices could climb toward $80 a barrel sometime in the third
quarter of the year.

Meanwhile, the Indonesian Chamber of Commerce and Industry
(Kadin) reiterated on Wednesday its recommendation for the
government to raise domestic fuel prices for general use, except
for labor-intensive businesses and public transportation.

Kadin chairman Mohamad S. Hidayat argued that an adjustment in
fuel prices based on international market rates would contribute
to strong fundamentals in the country's economy over the long
term and provide much-needed certainty in prices for industry
players.

Aside from Kadin, Vice President Jusuf Kalla and Coordinating
Minister for the Economy Aburizal Bakrie -- who are former
businessmen -- have lately raised the possibility of increasing
fuel prices once again this year in a bid to mitigate the
negative effects of its burgeoning subsidy payments.