Indonesian Strategy:Fuel prices cut (again);11th stimulus

Today’s cabinet meeting was also intended to discuss the reduction of dieselsubsidies (currently Rp1.0k/litre) – something that would have been a positive.

However, the outcome was instead a Rp500/litre cut in both RON 88 anddiesel prices, with diesel subsidies kept in place. We believe this highlightsthat policy is still favouring short-term ‘quick fixes’ that entail immediatepayoffs over structural reforms that require short-term sacrifices. The policymay have come in response to BI’s recent statement that March inflation islikely to tick up to 4.5–4.6%; rising inflationary expectations in February; andpotentially also fledgling signs the economy is starting to slow again.

While we estimate Rp6.5k is in line with market prices, instead of below,provided VAT is excluded, the policy is again attempting to capitalise close-tobottom-of-the-cycle oil prices into retail prices at a time when the rupiah isalso likely peaking (in our view). We believe this to be a negative, given howpolitically sensitive/challenging raising fuel prices has been in the past, andwe note that since November 2014, Indonesia has failed the only true test ofits resolve by failing to raise prices during 2Q15A’s oil price rally. If oil pricesrebound, we believe the chance retail prices are raised is only 50:50. The cutsare also coming despite the government’s already-stretched fiscal position.

Meanwhile, Indonesia’s 11th stimulus package contained very little ofconsequence in our view. The most substantive policy was a decision to lowerthe final tax on the sale of property into REITs from 5.0% to 0.5%, which willlikely assist with the establishment of local REITs. However, this is a nichepolicy that we expect to entail limited broader economic benefits.

The other announced measures were not particularly exciting in our view, andinclude subsidised interest rates for small exporter loans (we prefer freemarket solutions to further subsidies/government programmes); a targetedreduction in port dwell times (not a new issue or policy objective); policies toincentive the local production of pharmaceutical raw materials (importsubstitution); policies to support local pharmaceutical R&D (more governmentprogrammes); and a greater role for the state postal service in boostingfinancial inclusion (i.e. to use an SOE to promote social development goals).