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Economy

Cheap fuel no solution to Indonesia's problems

JAKARTA -- Despite the country reaping huge benefits from falling oil prices, Indonesia's financial markets have hardly budged. Stocks in 2014 have set record highs on expectations of reform by President Joko Widodo, but investors remain cautious about the economy's prospects.

     The cheaper oil could not have come at a better time for Indonesia, a producer of crude but a net importer. When Widodo announced he would raise gasoline prices last November, many citizens took to the streets in protest, in some cases smashing traffic lights and setting tires on fire. Only two months later, people cheered as gasoline prices were back down to 6,600 rupiah ($0.53) per liter, almost the level prior to the hike.

     Meanwhile, ending gasoline subsidies is already saving billions of dollars. The effects are being felt particularly in the revised 2015 budget, which was recently submitted to the parliament. Some 81 trillion rupiah is to be spent on fuel subsidies, less than a third of the 276 trillion rupiah earmarked by the previous administration. The savings will be used to boost infrastructure spending by 50% to 290 trillion rupiah.

     Inflation is also less of a worry. Bank Indonesia decided to hold interest rates steady at 7.75% at its Jan. 15 policy meeting. Prospects for long-term economic growth rose when a $4 billion sale of government bonds with maturities of five and 10 years received record orders.

     But short-term investors do not seem as excited. The benchmark stock index, which touched an all-time high last September driven by hopes for Widodo's reforms, has been stagnant so far this year and slid 0.8% on Jan. 16 following Widodo's announcement of lower gas prices. The rupiah is hovering at around 12,600 per dollar, only marginally higher than its 16-year low last December.

     One reason for the lack of appetite for risk seems to be the potential downside of a prolonged oil price decline. The World Bank says the worsening fiscal condition of oil-producing countries, such as Russia, may dent confidence in currency and securities markets in the broader emerging markets. Falling commodity prices will also hurt Indonesia, the world's largest exporter of power plant coal and crude palm oil. The institution expects Indonesia's economy to grow 5.2% this year, much lower than Widodo's target of 5.8%.

     Bank Indonesia says a boost in infrastructure spending could lead to "expanding non-oil/gas imports" and "potentially stifle improvements in the current account deficit," which it estimates narrowed to around 3% of GDP in 2014. The deficit, combined with high foreign ownership of government bonds, led to Indonesia being labeled a "fragile economy" and triggered a sell-off of the rupiah in 2013.

     But political uncertainty may be the biggest reason for the sluggish performance. Widodo's coalition does not control the majority of seats in the parliament, which may force compromises in the 2015 budget. The economic growth target of 5.8% this year has already been questioned by some officials from the opposition coalition. Investors seem to be waiting for the president to put his reform agenda to work.

     Widodo's recent move to nominate Budi Gunawan, who is being investigated by the Corruption Eradication Commission for graft, as the chief of police has further eroded investor confidence. The decision drew heavy criticism from all corners and dented Widodo's image as a reformist, said Intan Ichsan, chief operating officer of Samuel Aset Manajemen. Widodo later postponed Gunawan's appointment. Another political stumble by Widodo may put his reform agenda in jeopardy.

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