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Tigers count the cost of
easing fuel subsidies
By Bill Guerin
Tiny but wealthy Singapore does not
subsidize fuel costs, unlike neighboring
Indonesia, Malaysia and Thailand. Though it's the
region's oil trading hub, Singapore has the
highest fuel prices in Asia by far, averaging
92-98 US cents per liter, and is used as the price
benchmark for most fuel in the Asia-Pacific
because of its location and for being the largest
refining center in the region. Minister of State
for Trade and Industry Vivian Balakrishnan
suggested last week that there was a "silver
lining" for Singapore in high oil prices because
it was spurring investment to find cheaper and
more efficient fuel alternatives.
For all
three neighboring countries, however, the soaring
crude prices have dragged their governments into
the horns of a different dilemma. Jakarta, Kuala
Lumpur and Bangkok are now more concerned with
cutting fuel subsidies than with looking into
other energy alternatives.
Crude prices
rose to a fresh four-month high of more than US$53
a barrel last week and flirted with $55 this week
amid comments by Morgan Stanley analysts that
subsidies might actually have encouraged oil
producers to keep prices high because they can see
that economic growth is resilient, despite the
increase in energy costs. Though differing widely
in their approach to the issue, all three
governments need to rein in unpredictable spending
on subsidies because of the uncertainty over crude
oil costs, and to keep budget deficits under
control.
Even with crude oil prices
hitting new highs and persistent budget deficits,
the Malaysian government has assured consumers
that although it may reduce petrol subsidies it
will not remove them altogether. Thailand has
implemented subsidy cuts for diesel but has
allowed petrol increases by producers. Indonesian
President Susilo Bambang Yudhoyono's decision to
slash fuel subsidies, with the biggest cut in
those for petrol, has been the boldest of
all.
Oil sector analysts cite several
factors - continued worldwide geopolitical
instability, terrorist concerns, a weakening
dollar, and speculative futures purchases by hedge
funds - to support their predictions that crude
oil might soon reach $60 a barrel. The sting in
the tail for developing Asian countries is that
any increase in their domestic growth spurs
further demand for energy and costs taxpayers more
in supporting the artificially low fuel prices.
The Asian Development Bank in December trimmed its
2005 economic growth forecasts for the region,
saying higher oil prices may hurt global demand
and push up inflation.
Indonesia
Indonesians, whose
country is the only Asian member of the
Organization of Petroleum Exporting Countries
(OPEC), have been hardest hit of all. Their
president, Yudhoyono, was elected by a landslide
majority last year, and despite opposition in
parliament to his government's planned hike in
fuel prices and the certainty that street protests
would follow, he authorized a massive slash in
fuel subsidies last week, promising to redirect
the savings to fund increased spending on social
programs and help the needy through job creation
and small business programs.
On March 1,
fuel prices in Indonesia, though still the
cheapest in Asia, were raised for the first time
in 14 months by an average 29%. Petrol prices shot
up by a massive 33% to Rp2,400 (26 US cents) a
liter from Rp1,800. Diesel fuel also went up to
Rp2,100 per liter from Rp1,650. However, the price
of the socially sensitive commodity minyak
tanah (kerosene), widely used for cooking and
lighting in poorer homes, remains the same, though
kerosene for industrial use jumped to Rp2,200 from
Rp1,800. The price of kerosene has always been
kept low and is currently only about one-third of
the cost of production. Fuel subsidies cost
Indonesia almost $7 billion in 2004. "It is a
tough and bitter decision, but one we have to
take," Yudhoyono told reporters hours before the
dramatic hikes went into effect. "What is
important is that compensation reaches those who
need it, namely those on fixed or small wages."
Soaring world oil prices are a
double-edged sword for Indonesia. Although the
skyrocketing price means a boost in revenue for
exports of crude, the government has to shell out
even more to maintain the subsidies. The cuts in
subsidies are aimed at reducing the budget deficit
to 1% of gross domestic product (GDP) this year,
down from around 1.6% last year. Coordinating
Minister for the Economy Aburazil Bakrie points
out that oil prices even at $35 a barrel would
have meant spending up to Rp60.1 trillion on fuel
subsidies.
Another problem for Indonesia
is the imbalance between the country's production
capacity and its need for fuel. There is now
little or no new investment in the oil exploration
sector and officials from the Ministry of Energy
and Natural Resources have warned that total oil
production in Indonesia has dropped to a million
barrels per day. At the same time, domestic demand
for fuel continues to increase, with state oil
company Pertamina recording a 15% increase in
consumption of all types of fuel in February to
189.7 kiloliters, compared with the same month
last year. Latest figures indicate that annual
demand has already reached 1.1 million barrels a
day.
The price rises are expected to
increase costs for business, weaken consumer
purchasing power and push up inflation and
interest rates. A good supply of food from
agricultural harvests has kept food prices - the
biggest component of the inflation index - low,
but monthly inflation in January, according to the
latest published figures, was 1.43%, the highest
in the last three years. Annual inflation jumped
from 6% to 7.32%, and the largest factor was an
increase in the cost of foodstuffs, followed by
beverages and tobacco.
Malaysia
Malaysia is Southeast
Asia's second-biggest crude producer after
Indonesia. Like its bigger neighbor, it is also a
net exporter of crude oil but has the same dilemma
to face over the cost of subsidies. The cost of
artificially keeping down the retail price of
petrol, diesel and liquefied natural gas cost
Malaysia RM4.8 billion ($1.26 billion) in fuel
subsidies last year.
The government has
decided to tackle the diesel subsidies first and
leave the issue of heavily subsidized petrol until
later. Subsidies for diesel, widely used by
farmers, fishermen and road transport operators,
added up to about RM3.3 billion of the total fuel
subsidies handed out last year. The last diesel
increase was on October 1, when the price went up
by RM0.05, from RM0.78 per liter to RM0.83 per
liter.
On March 1 the regulated diesel
price was raised by 6%, up RM0.05 per liter to
RM0.88, in the first step toward reducing, not
eliminating, fuel subsidies. Prices for petrol and
liquefied petroleum gas (LPG) remained the same,
although the subsidies for these fuels totaled
RM1.09 billion in the previous five months.
The last time petrol prices were raised
was in October 2004, for the second time in five
months, when premium petrol prices increased to
RM1.42 per liter and regular grade to RM1.38.
Deputy Prime Minister Najib Tun Razak, in a speech
to ruling coalition lawmakers last weekend, though
warning that the government faced a continued
heavy financial burden because of the cost of fuel
subsidies on the back of record-high global oil
prices, admitted that the government has no
intention of removing petrol subsidies, although
it was studying how to reduce them.
Any
reduction in subsidies would be made gradually so
as not to shock people, he was quoted as saying.
"We have to condition the minds of the people
first before doing any review," he said at a news
conference. Economic Planning Minister Mustapa
Mohamed had already confirmed at an earlier news
conference, "We are not going to eliminate
subsidies completely but are reducing them
gradually or on a staggered basis." Mustapa
confirmed that though subsidies might be scaled
back gradually, they would not be eliminated.
From January, a government quota had been
imposed on the sale of subsidized diesel at petrol
stations to curb illegal sales to commercial
users. This followed the rampant abuse as
subsidized diesel cost RM0.83 per liter compared
with non-subsidized diesel sold to industries at
RM1.36 per liter, a difference of RM0.53 per
liter. Unsurprisingly, the sale of subsidized
diesel had soared last year to 4.7 billion liters
from 3.5 billion liters in 2003. The new diesel
price is still the third cheapest in the region,
after Brunei and Indonesia, at the equivalent of
RM0.72 and RM0.60 a liter respectively, and much
lower than Singapore, Thailand and Hong Kong.
Domestic Trade and Consumer Affairs
Minister Datuk Shafie Apdal said this was why the
government found it more suitable to raise the
price to reduce the subsidy. The government felt
that if the difference between the retail and
industrial price of diesel was lowered to less
than RM0.20 a liter, it was possible that such
abuse could be reduced, he said, adding that the
government's decision to raise the price of diesel
and not petrol was right, as the tax exemption and
subsidies for diesel were high. He said that even
with the price of diesel going up by RM0.05, the
government would still be losing a revenue of
RM654 million while having to provide RM338
million in subsidies this month to ensure that the
prices of petroleum products remained low.
Despite the rise, however, the central
bank said growth prospects remained favorable,
with the private sector expected to sustain
domestic demand even as the government curbs its
budget deficit this year to 3.8% of GDP from 4.5%
in 2004. It has allocated RM3 billion in total
fuel subsidies this year
Thailand
Prime Minister Thaksin
Shinawatra, who took office in early 2001, had
pledged diesel subsidies would be safe until last
month, which just happened to be the month he was
re-elected by an overwhelming majority. Thaksin
wasted little time in announcing a cut in
subsidies. However, as in Malaysia, it was diesel
users who felt the most pain.
Consumers
were hit by a 0.60 baht per liter (1 US cent)
adjustment of the local diesel price after the
government ended a one-year price freeze on diesel
prices that cost 63 billion baht to maintain a
capped price of about three-quarters of the market
rate. Thailand is still spending about 3.58 baht
per liter, around 179 million baht every day, to
keep local prices of diesel - on which most Thai
vehicles run - below the market level. Under
Thaksin's new managed float system, diesel prices
will be allowed to move up to the actual price.
Also in February, state oil giant PTT Plc
and other oil companies increased local petrol
prices by 0.40 baht a liter, sending the price of
premium petrol to 20.95 baht and regular petrol to
20.09 baht. This is still a long way from last
year's record highs of almost 23 baht a liter.
Thailand, unlike Indonesia and Malaysia,
has to import all of its oil needs. Along with
China, it consumes more than twice the oil per
unit of output than the average "rich-country",
according to International Energy Agency data.
Higher import bills have sent Thailand's trade
balance into the red. That has depressed the baht,
making imported fuel more expensive still, and
feeding the inflation the subsidies are supposed
to curb.
Back in Indonesia, where fuel
prices have been highly distorted for many years,
the cost of the subsidies has meant a much-reduced
capability to provide subsidies for productive
sectors such as labor-intensive agriculture, the
nation's prime asset, and has meant the specter of
mass unemployment continues to cast a shadow. On
the eve of the fuel price hikes, a poll conducted
by the Indonesia Survey Institute found the
president's popularity had dropped to 66% from 80%
in November, with respondents mainly criticizing
his efforts to improve the economy.
The
government will be hard pressed to convince the
public of the compelling need to accept not just
the higher fuel prices but also the increased
costs of living across the board as the only
alternative to keeping the country's fuel prices
well below world levels. Even after the cuts,
prices are only 50% or less of the international
market price. Persuading the public to accept the
fuel price hikes will also depend on the
government's performance in implementing a key
election pledge of Yudhoyono's - curbing
corruption.
Fraudulent practices are
widespread and subsidized fuel is re-exported by
smugglers and sold to industrial consumers. Forged
documents are a way of life and the smuggling of
paraffin and diesel out of the country commands
massive profits, easily able to cover the expense
of paying off officials or others who could
jeopardize the theft industry.
Though
demonstrations against the increases, initially
widespread, were more subdued than expected,
sporadic protests continue and more demonstrations
are expected in the coming days. The protests,
however, have raised the stakes in the political
arena. Indications are that opposition to the
price increases will be more vigorous in the
corridors of power than on the streets.
The planned hike was strongly opposed by
several factions in the House of Representatives
(DPR) with the Indonesian Democratic Party of
Struggle (PDI-P), the second largest in the DPR,
leading the onslaught. Only the Democratic Party,
led and co-founded by Yudhoyono, has said it
wholeheartedly supported the decision. Prior to
the hikes, Prosperous Justice Party (PKS)
legislator Rama Pratama, who sits on the powerful
budget commission, said details of the
government's compensation program were still
unclear and warned that his party rejects the fuel
price increases because the government has not yet
shown how compensation can reach the right target.
"The government also has no clear scheme to deal
with the inflation that will be triggered by
simultaneous increases in the prices of staple
goods," he pointed out.
Not only
opposition political parties criticized the
subsidy cuts; even factions with members in the
cabinet such as the National Awakening Party (PKB)
and the PKS, one of Yudhoyono's major political
allies in parliament, were prominent in
criticizing the cuts. Parliamentary Speaker Agung
Laksono, from the Golkar faction, headed by Vice
President Jusuf Kalla, has come out in public and
opposed the price rise, echoing the same
sentiments. "The government has still not provided
any satisfactory guarantees on any negative
impacts of a fuel price hike," he warned.
The government has chosen compensation
schemes to redress the imbalances and programs
will cover education, health, social services and
help for development of micro-credit businesses.
Free schooling for children from poor families has
been promised and Rp4.18 trillion has been
budgeted for compensation for the education
sector. Though there seems little doubt the
government will eventually win its case in
parliament, the pressing need now is to rein in
any unauthorized price increases, get the
compensation schemes up and running and win over
the public.
Malaysian Prime Minister
Abdullah Badawi and Thai Prime Minister Thaksin,
even if they were to make sweeping cuts in petrol
subsidies, would not have to face the same
socio-economic risks in their countries as
Yudhoyono does. Fauzi Ichsan, chief economist for
Standard Chartered in Jakarta, warns: "This [the
cuts] is very politically sensitive and will be
blamed on Yudhoyono if it goes wrong."
Bill Guerin, a weekly Jakarta
correspondent for Asia Times Online since 2000,
has worked in Indonesia for 19 years as a
journalist. He has been published by the BBC on
East Timor and specializes in business/economic
and political analysis in Indonesia.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.) |
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