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

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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

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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