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For Jokowi, real test on Indonesia fuel subsidy may be starting

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Rising oil prices have put Indonesian fuel costs back in focus as some economists question whether President Joko Widodo will bring back budget-draining subsidies.

[SINGAPORE] Rising oil prices have put Indonesian fuel costs back in focus as some economists question whether President Joko Widodo will bring back budget-draining subsidies.

Within three months of taking office in 2014, Jokowi scrapped subsidies on gasoline and capped aid on diesel in a move supported by investors and credit-rating companies. With oil prices falling at the time, he didn't face much protest from ordinary Indonesians either.

Now, with Brent crude rising 35 per cent this year to top US$50 a barrel and gasoline prices in Indonesia falling, concern is growing about whether the president - who is better known locally as Jokowi - will have the political will to raise fuel costs. Macquarie Group Ltd said in a note earlier this month that fuel prices are already at least 10 per cent below market prices and there's only a one-third chance that Indonesia will increase costs in line with international prices.

"It remains to be seen if the commitment will hold firm when faced with surging crude oil prices," Gundy Cahyadi, an economist at DBS Group Holdings Ltd in Singapore, said in an e-mailed response to questions.

"A return to a fuel-subsidy regime would mean that the government needs to allocate less for capital expenditure once again, which would hurt longer-term growth prospects."

The government adjusts prices for high octane fuel every three months, basing its calculation on the international price of oil, tax and other costs. The price of 88-RON gasoline, known as premium, fell 9.8 per cent to 6,450 rupiah a liter this year. The next price adjustment is due in July.

Subsidised fuel has been the norm in Indonesia since the first global oil-price shock in the 1970s. Since then, the nation's budget has borne most of the cost differential between market and fixed energy prices. Fuel subsidies would have eaten up 13 per cent of the budget in 2015 if they weren't removed in January, according to Oversea-Chinese Banking Corp.

If Jokowi's administration waivers in its commitment to scrap subsidies, the budget may come under additional strain. The government is already struggling to meet revenue targets as growth in Southeast Asia's largest economy slows, putting pressure on the budget deficit, which the government now sees reaching as high as 2.5 per cent of gross domestic product.

Stronger Currency

Domestic fuel prices may remain unchanged until September because oil prices are higher, but still within a range the government had predicted, said Gusti Nyoman Wiratmaja Puja, director general of oil and gas at the Energy and Mineral Resources Ministry.

"We will still evaluate prices every three months," he said.

"Crude oil prices are rising but still very stable."

S&P Global Ratings flagged risks related to the fuel subsidy in a review earlier this month in which it withheld upgrading Indonesia's credit rating from junk. It said the government had "apparent hesitancy" in allowing domestic gasoline prices to fully track international prices.

A stronger currency may have helped to offset the increase in oil prices, giving the government room to hold off on raising gasoline costs, said Khoon Goh, head of Asia research at Australia and New Zealand Banking Group Ltd in Singapore. The rupiah has strengthened 3.8 per cent against the US dollar this year.

"Indonesia can't return to fuel subsidies, it's very expensive," Mr Goh said in an interview.

"Tax revenue is already undershooting. If they go back to subsidies, they will have to raise taxes elsewhere and that will be difficult."