INDONESIA STILL PLANNING FUEL PRICE HIKE, BUT

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 000972 SIPDIS DEPT FOR EAP/MTS AND EB/IFD/OMA TREASURY FOR IA-SETH SEARLS SINGAPORE FOR SUSAN BAKER COMMERCE FOR 4430-JEAN KELLY DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN DEPARTMENT PASS EXIM BANK E.O. 12958: DECL: 05/15/2018 TAGS: ECON ID PGOV EFIN SUBJECT: INDONESIA STILL PLANNING FUEL PRICE HIKE, BUT WORRIED ABOUT PROTESTS REF: A. A) JAKARTA 871 - FUEL PRICE HIKE PLANS ¶B. B) JAKARTA 928 - MAKASSAR FUEL PROTESTS ¶C. C) JAKARTA 943 - INCREASING FUEL PROTESTS Classified By: Economic Counselor Peter Haas for reasons 1.4 (b+d) ¶1. (C) SUMMARY: President Yudhoyono approved a $1.6 billion cash transfer program for over 19 million poor households after convening a Cabinet meeting on May 14 to discuss plans for the proposed fuel price increase. While its economic rationale remains solid, the Government of Indonesia (GOI) is increasingly concerned that fuel-related protests could turn violent, according to a confidential presentation at the May 14 Cabinet meeting. Given the assistance program's costs and high world oil prices, President Yudhoyono's hands are tied more tightly to implementing the fuel price hike. End summary. PRO-POOR SPENDING DESIGNED TO OFFSET FUEL PRICE HIKE -------------- -------------- ¶2. (C) On May 14, the GOI announced a cash transfer program to counteract public backlash to the proposed fuel price hike. After a Cabinet meeting, President Yudhoyono signed a Presidential decree to implement a Rp 14.2 trillion ($1.6 billion) cash transfer program. The cash transfer program, the GOI's headline initiative, will provide 19.1 million poor households (an estimated 76.4 million people) with Rp 100,000 ($11.11) per month for seven months beginning in June. Finance Minister Sri Mulyani Indrawati said that the GOI would also propose to include this cash transfer program in the 2009 budget, according to press reports. The overall pro-poor strategy to counteract the fuel and food price increases includes three components: social security, pro-poor development, and small business development. The subsidized rice program, estimated to cost Rp 6.6 trillion ($733 million),is another key program of the "social security" component. Increased micro-credit loans to small and medium-sized enterprises is another pro-poor program. FUEL PRICE HIKE PLANS MOVING FORWARD -------------- ¶3. (C) At the May 14 Cabinet meeting, National Development Planning Minister (Bappenas) Paskah Suzetta presented the economic and political implications of the fuel price increase (ref A). In the PowerPoint presentation used by the Minister (copies emailed to EAP/MTS and INR),the GOI is concerned that the anticipated fuel price increase is raising basic commodity prices and leading to fuel hoarding, which could cause an oil shortage. Without a fuel price increase, the projected 2008 budget would include a Rp 125.3 trillion ($13.9 billion; Rp 9,000/USD) deficit, 2.9% of GDP. The total fuel subsidy expenditure could reach Rp 190 trillion ($21.1 billion) -- over 20% of the budget -- compared to the current Rp 126 trillion ($14 billion) projection, according to Finance Minister Fiscal Policy Unit head Anggito Abimanyu. Further, the fuel subsidy benefit is disproportionately biased to the rich: the top 40% of the population receive 66% of the benefit whereas the poorest 40% receive 18% of the benefit, according to the May 14 Cabinet presentation. After the proposed fuel price hike, the GOI estimates that inflation will rise to 11.2%, significantly higher than the current 6.5% projection. Economic growth is projected to slip to 6.0%, down from the 6.5% projection, but in line with World Bank projections. Although there is some debate on the exact percentage increase, the GOI economic team is in full agreement on moving forward with the fuel price hike, according to government and private sector contacts. CONCERNS OF VIOLENT PROTESTS AFTER FUEL PRICE HIKE -------------- -------------- ¶4. (C) The political implications of a fuel price hike are the biggest concern for the GOI (ref B and C). The May 14 Cabinet PowerPoint presentation states that fuel price hike will be a political commodity for the 2009 presidential JAKARTA 00000972 002 OF 002 election. The GOI fears that the current protests have the potential to turn violent. The Cabinet presentation also notes that transportation strike and demands for increased wages are also possible consequences. After the proposed fuel price increase, the GOI is concerned that there will be a perception that the government is not able to protect the poor's interests and that the GOI's credibility will be diminished, according to the Cabinet presentation. PARLIAMENT PROTESTS, BUT PREPARES FOR FUEL PRICE HIKE -------------- -------------- ¶5. (C) As world oil prices continued rising, Parliament gave the authority to the executive branch to increase fuel prices when it passed the last revised budget, according to Harry Azhar Azis, deputy head of Parliament's budget committee and Golkar member. Yet, political parties are now rejecting the fuel price increase proposal for their political benefit, according to Azis. Parliament's budget committee will likely revise its budget projections in July, which is a standard practice. Inflation projections will be increased to 11.2%, up from the 6.5% current estimate. Economic growth will be estimated at 6.0%, down from 6.4%. The oil price assumption will rise to $110 per barrel, up from $95. The central bank interest rate is projected to be 8.5%, up from the original 7.5% estimate and the current rate of 8.25%. STILL WAITING FOR OFFICIAL ANNOUNCEMENT -------------- ¶6. (C) Coordinating Minister for Social Welfare Aburizal Bakrie said that the GOI will review the cash transfer program implementation on May 23 and then make a determination on the fuel price increase. President Yudhoyono remains indecisive about the fuel price increase, according to a prominent Indonesian newspaper editor who met with the President and other editors to discuss the fuel price increase on May 12. Protests have remained largely peaceful, but the GOI is concerned about possible violent protests after the announcement of a fuel price hike, according to the May 14 Cabinet presentation. Despite vocal parliamentary opposition, Azis expects the GOI will raise fuel prices in early June. HEFFERN