Sign up | Log in



Home  >>   Daily News  >>   Indonesia News  >>   Energy  >>   Asean governments need to forego fuel subsidies
NEWS UPDATES Asean Affairs        31  May 2011

Asean governments need to forego fuel subsidies

Related Stories

May 27, 2011
Indian coal miner seeks Indo stake

May 26, 2011
Power deal on in Indonesia

May 21, 2011
Indonesia to increase power rates

May 18, 2011
Indo oil regulator questions production shortfall

April 21, 2011
Indonesia won’t reach oil production target

Asean governments have a narrow window of opportunity to pare back politically popular fuel subsidies on their own schedule before budgets or bond holders force their hands.

The wild card, as always, is oil prices. If crude climbs near 2008’s record highs, as many economists predict, Indonesia and Malaysia look particularly vulnerable as subsidies consume a bigger share of public spending.

Both countries have massive infrastructure needs to ensure their economies sustain rapid growth, and they can ill afford to spend more to keep energy costs artificially low. Both also know they must eventually change their ways.

Indonesia and Malaysia are not the only subsidizers in the region, but they have some of the lowest retail prices for diesel and gasoline across Asia. Indonesia’s are less than half those of China’s, for example.

Malaysian Prime Minister Najib Razak said earlier this month that subsidies were “like opium” and kicking the habit was hard but necessary. Just a week later, though, his government unexpectedly backed away from raising fuel prices. The about-face highlights how difficult it will be for countries to change before the fiscal cost becomes unbearable.

The economic case for curbing the subsidies is simple: they drive up deficits and divert money from much-needed investment, and they disproportionately benefit wealthier households, exacerbating income inequality.

The politics are trickier. The more expensive oil gets, the more voters demand subsidies. However, the consequence of keeping them is worsening public finances, which can alarm bond holders and scare off private investors.

Malaysia’s next general election is not due until 2013, but Najib could call for snap polls this year to secure his mandate. Najib said his government had budgeted 11 billion ringgit ($3.6 billion) for fuel subsidies this year, but the actual figure is expected to be around 18 billion ringgit because of high crude oil prices.

Anthony Nafte, a senior economist with CLSA, said Malaysia’s current account surplus meant it could afford to wait a bit longer before raising fuel prices, even though he expects the cost of subsidies to reach 2.3 percent of GDP, double its initial estimate.

Indonesia is a different story. Its current account surplus is smaller, leaving it more dependent on government debt to cover its budget deficit, which is modest but would swell if subsidy costs keep growing. If bond holders sense subsidies are swamping the budget, borrowing costs could spike.

Indonesia has had no difficulty attracting buyers for its debt, thanks to a growth rate expected to hit 6.5 percent and a strong rupiah. Roughly 30 percent of its debt is held by foreigners, though, putting it at risk should investor sentiment suddenly sour.

Nafte expects Jakarta to hit a breaking point in the next few months where the cost of sustaining subsidies outweighs the political pain of reducing them.

Indonesia’s next election is not until 2014, so a subsidy cut this year might be a distant memory when voters head to the polls. Indonesia budgeted Rp 187.6 trillion ($21.9 billion) for fuel subsidies this year, equal to 15 percent of total government spending. However, the budget assumed an average oil price of $80 per barrel, versus current levels of more than $100. The last time oil was less than $80 per barrel was September 2010.

Nafte said fuel subsidies currently amounted to about 2.5 percent of GDP, a level he called a “stress point” that would probably push the government to move. If oil rises to $140 per barrel and the rupiah strengthens against the US dollar, the cost of sustaining subsidies would hit 3 percent of GDP, he said.

Reach Southeast Asia!
10- Nations, 560- Million Consumers
And $1 -Trillion Market
We are the Voice of Southeast Asia Media Kit
The only Media Dedicated to Southeast Asia Advertising Rates for Magazine
  Online Ad Rates

Comment on this Article. Send them to

Letters that do not contain full contact information cannot be published.
Letters become the property of AseanAffairs and may be republished in any format.
They typically run 150 words or less and may be edited
submit your comment in the box below




1.  Verifier

1. Verifier

For security purposes, we ask that you enter the security code that is shown in the graphic. Please enter the code exactly as it is shown in the graphic.
Your Code
Enter Code

Today's  Stories    31  May 2011 Subsribe Now !
• Asean governments need to forego fuel subsidies Subcribe: Asean Affairs Global Magazine
• Easing food prices to slow inflation Asean Affairs Premium
• Philippines growth slows
Research Reports
on Thailand 2007-2008

•Textiles and Garments Industry

•Coffee industry

•Leather and footwear industry

•Shrimp industry

• Thaksin denies lust for power
• Thai satellite moves closer

• Central buys Italian department stores

• Fuel imports to Vietnam increase

• Vietnamese electronics sector hit by imports

Asean Analysis    31   May 2011

Advertise Your Brand
• Politics and economics in Thailand Sponsor Our Events

Asean Stock Watch    31  May 2011

• Asean Stock Watch-May 31 p

Global News Impacting Asia    17 November 2010


• Bank of America sees Asian inflation


• Lloyd’s increases insurance push in Malaysia


• Wells Fargo analyst on euro


• Obama’s visit to Asia


ASEAN NEWS UPDATES      Updated: 04 January 2011

 • Women Shariah scholars see gender gap closing
• Bank Indonesia may hold key rate as inflation hits 7 percent

• Bursa Malaysia to revamp business rules
• Private property prices hit new high in Singapore
• Bangkok moves on mass transport
• Thai retailers are upbeat
• Rice exports likely to decline
• Vietnamese PM projects 10-year socioeconomic plan


This year in Thailand-what next?

AseanAffairs   04 January 2011
By David Swartzentruber      

It is commonplace in journalism to write two types of articles at the transition point between the year that has passed and the New Year. As this writer qualifies as an “old hand” in observing Thailand with a track record dating back 14 years, it is time take a shot at what may unfold in Thailand in 2011.

The first issue that can’t be answered is the health of Thailand’s beloved King Bhumibol, who is now 83 years old. He is the world's longest reigning monarch, but elaborate birthday celebrations in December failed to mask concern over his health. More


Home | About Us | Contact Us | Special Feature | Features | News | Magazine | Events | TV | Press Release | Advertise With us

| Terms of Use | Site Map | Privacy Policy  | DISCLAIMER |

Version 5.0
Copyright © 2006-2020 TIME INTERNATIONAL MANAGEMENT ENTERPRISES CO., LTD. All rights reserved.
Bangkok, Thailand