Fitch: Amended fuel bill has little credit impact on Indonesia

The amended Indonesian fuel price bill passed on Saturday has very little impact on the overall balance of risks in Indonesia?s credit profile, but it does highlight how the momentum for reform is likely to stall between now and the 2014 presidential election, Fitch Ratings says.

The Indonesian parliament blocked a bill that would have increased subsidised gasoline prices by 33%. However, it did pass an amended bill that would allow the government to raise prices if the 6-month average Indonesian crude oil price is 15% above the USD105/b assumption used in the amended 2012 Indonesian government budget.

The failure to pass the original bill, which had generated widespread protests in Indonesia, has no impact on the country?s ?BBB-? rating with a Stable Outlook. The proposed 33% price increase was more ambitious than any subsidy reform that had been contemplated when we upgraded the Indonesian sovereign to investment-grade in December last year.

As we noted in March, the envisaged reform would have been positive for Indonesia?s sovereign ratings, limiting the fiscal impact of higher oil prices and enhancing fiscal flexibility. These benefits may yet emerge, since the government has the right to raise fuel prices in the future ? subject to local oil prices meeting the conditions set out in the amended bill. If they do not, execution of capex plans may suffer, with the potential to limit the government?s ability to improve infrastructure and address long-standing supply constraints.

The potential risk associated with a rise in gasoline prices ? a rise in inflation ? is alleviated for now, but inflation expectations are likely to remain high, owing both to policy easing and expectations of fuel-price hikes. The credit profile has a higher tolerance of structural weakness than loose monetary policy, in light of Indonesia?s history of relatively high and volatile inflation relative to its ?BBB? peers. We believe Bank Indonesia (BI) will tighten policy settings if necessary, but have noted in the past that this remains an area of concern due to some growth bias in BI policy.

The political challenge presented by increasing fuel prices was also evident at the time of the December upgrade, given the delays suffered by previous proposals. We noted how the informal build-up to the 2014 election had begun, potentially slowing governance as well as economic reform measures that could strengthen the credit profile over the long term. (ends)