Fuel Prices Have Rise, What’s Next?

Jakarta, CNBC Indonesia – The price of subsidized fuel oil (BBM) has gone up. The impact is certainly big, because fuel is an item that concerns the lives of many people. Last weekend, President Joko Widodo (Jokowi) and a number of ministers made a surprising announcement. After a long time of being the subject of speculation, finally the fuel price hike was actually executed. Effective as of September 4, 2022 at 14:30 WIB. The price of RON 90 or Pertalite fuel types rose from Rp. 7,650/liter to Rp. 10,000/liter. Meanwhile, the price of diesel or diesel oil rose from Rp. 5,150/liter to Rp. 6,800/liter. Pertalite and Solar are subsidized fuels. However, it was not only subsidized ones that went up, non-subsidized fuel prices were also raised. The price of RON 92 or Pertamax fuel has increased from Rp 12,500/liter to Rp 14,500/liter. In terms of managing the State Revenue and Expenditure Budget (APBN), it is difficult to avoid increasing fuel prices. The question is no longer going up or not, but when it will go up. The 2022 APBN is prepared with the assumption that the average Indonesian oil price (ICP) is US$ 63/barrel. In fact, the price of the black gold is far above that. ICP value is close to brent, so the two can be juxtaposed. Throughout 2022, the average Brent price will be at US$ 103.87/barrel. Far above the 2022 APBN assumption. Another factor that will affect the fuel subsidy (and compensation) budget is the exchange rate. This is because Indonesia is a net-importer of oil. Domestic production has not been able to meet demand, so there is an import component, which is paid for in foreign currencies, especially the United States (US) dollar. So when the rupiah weakens, the cost of imports will swell and make the cost of fuel procurement also rise. The 2022 APBN assumes the average exchange rate of the rupiah against the US dollar at Rp. 14,350/US$. As of September 2, the average was IDR 14,895/US$. Still above assumptions. This year, the budget for energy subsidies and compensation is estimated to increase to Rp 502.4 trillion. Remember, it’s just energy subsidies, not non-energy. However, the amount has far exceeded the initial ceiling in the 2022 State Budget Act, where the subsidy budget is set at Rp 206.96 trillion. Therefore, control measures must be taken immediately. If conditions remain as they are now, business as usual, the demand for Pertalite will increase so that the burden of subsidies and compensation will be heavier. One of those controls is through price. When the price of Pertalite rises, it is hoped that people will reduce consumption so that the cost of subsidies can be reduced. In addition, the price increase also reduces the price difference borne by the state, which automatically reduces the burden of subsidies.

Fuel Prices Rise, Inflation Soars
The increase in fuel prices will have a broad impact. Because, fuel is an item that is consumed by the people of Indonesia. Therefore, it is undeniable that Indonesia’s inflation will rise. Currently, inflation in the country is already above 4%, something that has not happened since 2017. Faisal Rachman, an economist at Bank Mandiri, said that the increase in Pertalite prices by 30.72% and Pertamax by 16% will contribute to inflation of 1.35 percentage points (ppt). ). Meanwhile, the price of diesel, which rose 32.04%, added 0.17 ppt to inflation. “Thus, we predict inflation at the end of 2022 to be in the range of 6.27%, or higher than our initial projection of 4.6%. We project core inflation to be in the range of 4.35% by the end of the year, “said Faisal in his research. Rising inflation, continued Faisal, will make Bank Indonesia (BI) more aggressive in tightening monetary policy. Further hikes in the benchmark interest rate are inevitable. “The increase in general inflation to around 6.27% this year and core inflation above the target range will encourage BI to raise the benchmark interest rate a maximum of 100 bps (basis points) to 4.75% in the remainder of 2022, or higher than the initial assumption. our 50 bps to 4.25% before the subsidized fuel price hike. Furthermore, the continued increase in inflation in semester I-2023 will also open up opportunities for BI to continue raising the benchmark interest rate early next year,” he explained.

Rising fuel prices are not always bad news
Increases in fuel prices and interest rates will more or less erode people’s purchasing power, reduce consumption, and slow down economic growth. Faisal estimates that the Indonesian economy will grow at around 5% this year. “The increase in the price of the three types of fuel risks cutting economic growth by 0.33 ppt. Thus, we still see that the Indonesian economy can still grow in the range of 5% on a full-year basis in 2022,” he wrote.
However, the increase in fuel prices does not always have a negative impact. Research from Bahana Sekuritas states that the increase in fuel prices will create certainty in the market. No more guessing. “Many market participants estimate that if there is a correction in the market due to the increase in fuel prices, it will only be temporary. This policy will indeed boost inflation, raise interest rates, and hit consumption in the short term. rupiah-based assets,” said Bahana’s research.
Although Indonesia’s inflation could touch the 6-7% range, continued Bahana’s research, the sell-off on financial assets would be limited. Because, after all, Indonesia’s inflation is still below that of other countries. In the UK, for example, inflation reached 10.1% in July 2022. “We see the increase in fuel prices as a crucial factor to attract investors again,” said Bahana’s research.


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