Moody’s: Indonesia’s fuel price hikes credit positive for sovereign, Pertamina | Outlook data
(TIS) - The increases by Indonesia’s government of the subsidized premium gasoline price by 44% and diesel price by 22% will reduce government expenses and keep the fiscal deficit under the legal deficit cap of 3%, and will save state oil and gas provider PT Pertamina an estimated $3.6 billion in up-front subsidy costs, credit rating agency Moody’s Investors Service says in a credit outlook. Below is an excerpt from the report.
Indonesia’s Fuel Price Hikes Are Credit Positive for the Sovereign and Pertamina
Rachel Chua, Associate Analyst, Corporate Finance Group, Moody’s Investors Service Singapore Pte. Ltd.
Christian de Guzman, VP - Senior Analyst, Sovereign Risk Group, Moody’s Investors Service Singapore Pte. Ltd.
Simon Wong, VP - Senior Analyst, Corporate Finance Group, Moody’s Investors Service Singapore Pte. Ltd.
** Below is extracted from “Moody’s Credit Outlook”, Jun 24, 2013 issue.
On Saturday, Indonesia’s (Baa3 stable) government raised the price of gasoline by 44% and diesel by 22% after the parliament passed a revised budget calling for reductions in fuel subsidies on 17 June. The subsidy reform is credit positive for the sovereign because it will incur lower expenses and keep the fiscal deficit under the legal deficit cap of 3% of GDP. It is also credit positive for state-owned integrated oil and gas company Pertamina (Persero) (P.T.) (Baa3 stable) because it is required to sell fuel below its cost and await reimbursement from the government. A lower subsidy increases Pertamina’s working capital, decreases its funding cost and reduces potential losses arising from insufficient subsidy reimbursements from the government.
By revising Indonesia’s fuel subsidy scheme, the parliament addressed an increasingly large strain on the government’s fiscal position. Fuel subsidies reached 14.3% of total budgetary expenditures in 2012, up significantly from 4.8% in 2009, the year after the last round of subsidy revisions (Exhibit 1). Without the fuel subsidy reform, both Indonesia President Susilo Bambang Yudhoyono and Finance Minister Chatib Basrie have asserted that the country’s fiscal deficits would have exceeded the legal deficit cap of 3%.
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The revised budget’s allocation for fuel subsidies rose to IDR209.9 trillion from IDR193.8 trillion in the original budget. However, as in previous years, actual spending on subsidies will likely exceed the budgeted amount owing to the strong demand for fuel amid 6% real economic growth.
Nevertheless, we also expect the government’s pattern of under-spending on capital expenditures (Exhibit 2) will offset the government’s tendency to exceed its budgeted allocation for subsidies, thus capping the upside risk to the revised budget deficit target of 2.4% of GDP, up from the original budget target of 1.6%. Although more subsidy reforms are unlikely over the next year owing to upcoming elections, the associated fiscal costs could be further contained by stability in both global oil prices and the rupiah.
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In Indonesia, the government controls the price of motor gasoline, automotive diesel oil, kerosene and liquefied petroleum gas (LPG), requiring retailers to sell these fuels below cost. Downstream oil and gas companies such as Pertamina receive compensation from the government in accordance with an annually adjusted subsidy formula. However, if the market price for crude oil or LPG exceeds the $100 per barrel assumed in the formula for 2013, or if the margins in the formula do not sufficiently cover distribution costs, Pertamina must absorb the difference, potentially resulting in losses for its downstream business.
We estimate that Pertamina will save $3.6 billion in upfront subsidy costs in 2013, alleviating pressure on the company’s working capital as it awaits reimbursement from the government. Assuming that the proportion of Pertamina’s revenue from the sales of subsidized fuel remains unchanged from 2012 levels at 58% and that the price hike will go into effect in July, we expect working capital needs to fall by 8%-10% in 2013 and by 18%-20% in 2014, when it realizes the full-year benefits of higher fuel prices. Currently, the government pays 95% of Pertamina’s monthly subsidy claim the following month, while the remaining 5% is paid at the end of each quarter.
The smaller subsidy amount reduces Pertamina’s exposure to potential losses in its downstream segment owing to insufficient government reimbursement of fuel subsidies. Pertamina reported losses of $107 million in 2012 and $91 million in 2011 as a result of under-recoveries from the government for these reimbursements.
