Indonesia’s Budget May Face Pressure as Oil Rises

Indonesia’s budget may come under pressure as the government prepares to increase subsidies to cap fuel prices and match a jump in crude that has more than doubled in the past year.

“If oil prices increase to $170 a barrel, of course there will be problems,” Vice President Jusuf Kalla said in an interview in Jakarta yesterday. The government, which bases its budget assumptions for oil to average at $140, will spend more to cap pump tariffs should fuel costs extend gains, he said.
Kalla ruled out a further increase in fuel prices after the government raised pump costs for the first time in almost three years in May, on concern it will spur inflation as President Susilo Bambang Yudhoyono prepares for elections due in 2009. The government, waning in popularity, may spend as much as $33 billion in energy subsidies next year.

“They will respond once oil price reaches $160 a barrel, by raising fuel prices,” said Chetan Ahya, managing director for research at Morgan Stanley in Singapore. If oil extends gains, “they may be inclined to raise fuel price before next year because there is lot of time to hold prices till elections next year.”

Yudhoyono raised fuel prices by about 30 percent in May to reduce the government’s subsidy burden. That made it more expensive to transport food, steel and cement across the 18,000 islands that make Indonesia the world’s largest archipelago, pushing the inflation rate to 11 percent in June, the highest in 21 months.

The government won’t raise fuel prices “this year and the election year,” Kalla said, adding that “politically and socially, you cannot do that.”

Bloomberg