Finance Minister Sri Mulyani Indrawati - Photo by Finance Ministry

JAKARTA (TheInsiderStories) – The rising of global oil price has hit Indonesia’s budget and could disrupt the economy if the government not taking the right policy to face it. Yesterday, Finance Minister Sri Mulyani Indrawati announced the country’s energy subsidy has soar to a four-year high amid the rising of the oil price.

She reported to the Budget Committee of Indonesia’s parliament, total energy subsidy is seen at Rp163.5 trillion (US$11.43 billion) in 2018, or rose almost double from initial planned Rp94.5 trillion. That would be the highest subsidy bill since 2014 and compares with Rp97.6 trillion last year, official data showed.

Indrawati explained the amount consists of the realization of fuel subsidy for LPG 3 kilogram of Rp103.5 trillion or rose 220.8 percent of the target and the electricity subsidy budget of Rp59.99 trillion or up 125.9 percent of the target. So far until the first half of 2018 reached the realization of energy subsidy reached R 59.51 trillion or 63 percent of the target.

She continued, the swelling of the subsidy budget is the result of the government’s calculation based on the amount of subsidy that already existed in the first semester and the difference in the price of diesel set at the current price.

She added, the proposal to increase the energy subsidy allocation was based on several factors. First, to anticipates an increase in crude oil prices and a slight decline of the rupiah’s exchange rate against the U.S dollar.

Earlier, Indrawati stated that the government had agreed to increase diesel subsidy amounting to Rp1,500 per liter for the total subsidy to Rp2,000 per liter in 2019 to keep state-owned energy producer PT Pertamina and PT Perusahaan Listrik Negara balance sheet maintained.

However, Minister for Energy and Mineral Resources  Ignasius Jonan has announced that the government will not raise the fuel price until 2019. Throughout this year, the world oil prices have been hovering in a range of US$60 per barrel, or higher than last year. The oil price is above the government’s oil price target set in the 2018’s State Budget of $48 a barrel.

The government of Indonesia (GoI) regularly revises the state budget around the middle of the fiscal year (usually in June or July), in order to calibrate its fiscal position with the latest macroeconomic indicators. But, the minister has stated not to revise the 2018’s State Budget.

Over the past two years world oil prices have continued to decline. In fact, the price had fallen to $30 per barrel in early 2016 ago. But now, slowly world oil prices continue to climb. Currently crude oil prices according to WTI Crude Oil standards are in the range of $70 per barrel.

The recovery in world oil prices was attributed to an agreement by oil-producing countries to cut output and exports by 1.8 million barrels per day. Production and export cuts begin in November 2016.

World oil prices are experiencing a recovery to fresh air for oil-producing countries and certainly the oil and gas industry players in the country. In fact, for Indonesia, which over the past few years has become a net importer country, rising world oil prices will have a direct impact on the growth of national Gross Domestic Product (GDP).

Oil prices in 2018 are expected to continue to rise as in addition to cuts by oil-producing countries, demand also increases. Current consumption of oil in the United States, Europe, China, and India also increased.

According to the DBS team of economists Suvro Sarkar, Pei Hwa Ho, Glenn Ng, William Simadiputra and Janice Chua in the “DBS Group Research Regional Industry Focus report titled Regional Industry Focus: Oil and Gas”, that world crude oil consumption growing from 1.4 to 1.5 million barrel oil per day (bpd) in 2017 to 2018.

The research team said, the increase in crude oil demand is estimated to rise to the position of $60 to $65 per barrel. The rise in world oil prices will automatically trigger an increase in the price of fuel in Indonesia.

From macroeconomic perspective, since fuel is an administered price commodity, the decision will help the government in keeping inflation rate at a low level. But, the decision to hold the retail fuel price at the current level could be at the expense of Pertamina and PLN.

Minister Jonan argues that the decision to keep the fuel and electricity tariff is intended to boost consumers’ purchasing power and aims to achieve economic growth of 5.4 per cent next year.

Jonan called on the PLN and Pertamina to operate more efficiently, eventually enabling lower prices. For example, he suggested the company adjust and lower its maintenance costs for transmission and distribution lines.

Need to Revises Energy Policy

The DBS research team said the increase in crude oil prices will have a positive impact on the Indonesian government budget, as tax and non-tax revenues from the oil & gas sector are estimated at Rp113 trillion or 10 per cent higher than the 2018 energy subsidy.

However, the rise in world oil prices, which could trigger a rise in fuel prices, will push prices of staples upward, as a result of high production costs, even though the Indonesian government may not increase the price of fuel to maintain operational costs. However, policies to keep fuel prices down should consider the availability of budgets for subsidies.

The increase in fuel does have a domino effect, which encourages the rise in prices of basic commodities and other services, and leads to higher inflation. By using the Consumer Price Index (CPI)– an indicator of a country’s rate of inflation, the transportation and electricity sectors in Indonesia become the main contributors, determining 25 percent of all existing CPI categories.

Therefore, DBS predicts that every 10 percent increase in world crude oil prices will have a 0.6 per cent impact on inflation. This condition is clearly a challenge for the government amid efforts to boost economic growth and enhance competitiveness to encourage investment. Therefore, inflation is an important element that affects the investment rating of a country.

However, subsidies to maintain fuel prices and suppress inflation must also be thoroughly considered – not only the availability of a budget, but also the impact of renewable energy development efforts. It is clear that under the current high oil price environment, raising or keeping the oil retail price and electricity tariff would have benefits and costs for the government.

If the fuel and electricity prices are maintained, the government would be able to guard the inflation at a low level. However, that could be at the cost of Pertamina and PLN. If the price is raised, that could hit hard the consumer’s purchase power.

Based on the current situation, we urged the government to revised the energy policy to help the government’s budget and to keep away the risks on the domestic economy. If not, we believed it would backfire for the Widodo’s government and disrupt the national economy.

US$1: Rp14,300