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.