President Joko Widodo holds meeting with Cabinet Kerja. (Photo: President's Office)

JAKARTA (TheInsiderStories) – Indonesian government’s plan to raise energy subsidy in the State Budget will likely help maintain Indonesia’s sovereign rating outlook from international rating agencies.

Recently, President Joko Widodo’s administration has revealed its plan to raise fuel subsidy as a consequence of keeping the subsidized fuel and electricity tariffs unchanged.

The Finance Minister Sri Mulyani Indrawati has said the decision is made based on the current position of the Indonesian Crude Price (ICP), which stands at around US$60 per barrel, far higher than the ICP set in the 2018 State Budget of $48 per barrel.

“We have made calculations with the Energy and Mineral Resources Minister and the State-Owned Enterprises Minister yesterday regarding how much subsidy Pertamina will need for diesel oil,” Sri Mulyani told Tempo in Jakarta on Tuesday (6/3).

In 2017, the government spent Rp97.6 trillion ($6.87 billion) on energy subsidies, compared with Rp341.8 trillion in 2014. The State spending on infrastructure has risen more than 80 per cent to Rp376.1 trillion in the same period.

Ego Syahrial, director general for oil and gas at the energy ministry, said there will be no change in prices of low-octane, RON 88 gasoline, for 2018 and 2019. The fuel is currently not subsidized, but its price is set by the government every three months.

He also said the government will seek parliamentary approval to raise diesel fuel subsidies to between Rp700 and Rp1,000 per liter, from the current Rp 500. The energy ministry has estimated that electricity subsidies will have to be increased by around Rp5 trillion in 2018.

Some analysts mentioned the plan is as a backward in Indonesia’s fiscal policy, reminiscing the nation has been successful in scrapping fuel subsidy and making policy reform in 2014.

This policy of energy subsidy reform has reaped positive appreciation from a number of international institutions, such as the World Bank and rating agencies that hoisted Indonesia’s credit rating to an investment-worthy level.

Recently, Indonesia was awarded Investment Grade status by three reputable international rating agencies: Moody’s, Standard and Poor’s (S&P) and Fitch Ratings.

However, there is certainly a compensation (trade-off) in raising fuel subsidies against other State expenditures. Currently, the government needs substantial funds for infrastructure spending and poverty alleviation.

If fuel subsidy increases then the allocation for both programs will be stagnant. In fact, these are priority programs that are used by the community to measure the performance of the government.

In addition, raising fuel subsidy is not a populist policy for the government and could politically disrupt the electability of Joko Widodo, who will run for the second term in the 2019 presidential election.