Indonesia Rupiah & Stock Market Update: Reacting to Fuel Subsidy Speculation

On Wednesday’s trading day more than 5.6 billion Indonesian shares, worth IDR 5.7 trillion (USD $488 million), were traded. Foreign investors recorded net buying of IDR 268 billion (USD $22.6 million).

Asian markets were supported by higher closings on Wall Street on Tuesday (26/08) partly caused by a surge in August US consumer confidence (which unexpectedly climbed to the highest level in almost seven years). The Standard & Poor’s 500 moved beyond the 2,000 points level for the first time, while the Dow Jones Industrial Average rose 0.2 percent to 17,106.70, only 32 points below its record close on 16 July 2014. Meanwhile, durable goods orders in July 2014 jumped 22.6 percent, the largest one-month growth since the US Commerce Department began compiling these data. However, this surge was mainly caused by a jump in demand for Boeing airplanes.

The rupiah is highly susceptible to Indonesia’s energy subsidy policy. Due to declining domestic oil output Indonesia has been increasingly relying on imports of expensive oil to meet the ever increasing fuel demand of the people. Domestic oil demand has been rising amid robust economic growth and is supported by generous government subsidies for the purchase of fuel. The large deficit in the country’s oil & gas trade balance is the major cause for the wide current account deficit and thus provides great stress on the currency. Recently, Bank Indonesia announced that the current account deficit widened to USD $9.1 billion, or, 4.27 percent of the country's GDP in the second quarter of 2014. This widening was much larger than forecasted by analysts and also meant a sharp widening from (a revised) 2.05 percent of GDP deficit recorded in the previous quarter. Since late-2011, Indonesia has had to cope with a structural current account deficit, mainly caused by the structural oil problem.

State-owned energy company Pertamina announced to limit the daily amount of subsided fuel that is transferred to gas stations in an attempt to safeguard the fuel subsidy quota for full year 2014. If daily transfers of subsidized fuel would continue at the current level then it would run out around November. This policy change is required as the revised State Budget lowered the nationwide subsidized fuel quota from 48 million kiloliters to 46 million kiloliters (and which has led to long queues at gas stations in the past days).

Moreover, it was reported that incumbent president Susilo Bambang Yudhoyono and soon-to-be president Joko Widodo (Jokowi) met at Bali to discuss about various transitional matters. Speculation emerged that the pair also discussed the possibility of a fuel price hike before the new Jokowi-led government will take charge in October 2014. Jokowi recently stated that he believes that the energy subsidies as set in the revised 2015 State Budget are too high (IDR 363.5 trillion), particularly the fuel subsidies, and limit public investments in infrastructure, healthcare and education.

Indonesian Energy Subsidies:

Year	Fuel Subsidies	Electricity Subsidies
2015	291.1	72.4
2014	246.5	103.8
2013	210.0	99.9
2012	211.9	94.6
2011	165.2	90.4
2010	82.4	57.6
2009	45.0	49.5
2008	139.1	83.9
2007	83.8	33.1
2006	64.2	30.4
2005	95.6	8.9
2004	69.0	2.3

^{in trillion rupiah}

Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.06 percent to IDR 11,708 per US dollar on Wednesday (27/08).

| Source: Bank Indonesia

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