Indonesia eyes fuel subsidy cut delay, to let rupiah rise

Indonesia said on Thursday it is considering delaying a plan to limit the use of cheap subsidised fuels to next year as it seeks to avoid surging oil prices adding to inflation, despite a potential cost of over $600 million to the state budget. 

Chief economics minister Hatta Rajasa said the government has no plans to hike subsidised fuel prices, a move that would boost inflation and likely to lead to protests. Vietnam on Thursday hiked gasoline and diesel prices by up to 24 percent. 

Instead, Indonesia's central bank will let the rupiah currency strengthen to curb imported inflation, deputy governor Hartadi A. Sarwono said, as it is concerned about high oil prices following turmoil in the Middle East. 

Indonesia's government had aimed to stop private cars in the capital Jakarta from using cheap subsidised fuel from end-March, before rolling the pan out across the country, but may delay the start, said Rajasa. 

"The financial consequences would be to add 3-6 trillion rupiah of additional subsidies for one year," said finance minister Agus Martowardojo.

The comments come as London oil prices surged over $6 to $117 a barrel, and ahead of Indonesia's February's inflation data next Tuesday. 

Some analysts see higher-than-expected inflation leading Bank Indonesia to hike rates by another 25 basis points when meeting on March 4 in an effort to stem price pressures, after January inflation reached a 21-month-high of 7 percent. 

"We are concerned over imported inflation both from oil and food prices. We keep monitoring rising oil prices," Bank Indonesia's Sarwono told reporters. 

Sarwono said Indonesia's foreign exchange reserves had reached a record $97 billion, a level nearly double two years ago and that gives the central bank more ammunition to intervene in the currency market. 

Bank Indonesia hiked rates by 150 basis points in 2008 to counter growing inflation after the government was forced to hike subsidised fuel prices by almost 30 percent on average because of record oil prices. 

Indonesia is the country in Southeast Asia that is the most exposed to a sharp rise in oil prices and policymakers will face a dilemma as tightening rates may slow growth, CIMB said in a report on Thursday. 

"Some central banks are willing to tolerate a stronger currency as part of their efforts to bring inflation under control," said CIMB's Lee Heng Guie. 

The rupiah has gained 1.5 percent this year, adding to near 5 percent gains last year.

The former OPEC oil producer is forced to import gasoline and diesel from the regional market since its ageing refineries do not produce enough fuel, but still maintains subsidised fuel. 

Analysts say the government needs to use the money spent on subsidies to instead improve infrastructure, which would help draw further foreign direct investment and improve the chances of getting a coveted investment grade sovereign rating. 

However, protests over price hikes were seen as a major factor in the ousting of Indonesia's autocratic President Suharto in 1998 and would hit the current administration's popularity. Source: Reuters