Fitch: Impact of Indonesia fuel subsidy cuts on autos likely temporary endorsement policy

(17 November 2014) -- Fitch Ratings says the reduction in car and motorcycle sales in Indonesia following planned fuel subsidy cuts is likely to be temporary and the risk profiles of auto players likely will not be materially impaired.

The government plans to cut its fuel subsidy bill by increasing the subsidised fuel price by up to IDR3,000 from IDR6,500. The increase in the subsidised fuel price will drive inflation and keep interest rates high for at least the next 12 months. This is likely to impair consumer's purchasing power and slow down the demand for car and motorcycle purchases. With about two-thirds of car purchases in Indonesia funded by vehicle financing, higher borrowing costs would lead to car purchases being postponed.

However, Fitch expects the reduction in auto sales to have only a short-term impact and sales are likely to recover along with the Indonesian economy. The faster the government is able to shift the savings in its subsidy bill to the real sector, the faster it would help stimulate the economy. Fitch does not expect the ratings performance of auto players such as PT Mitra Pinasthika Mustika Tbk (BB-/Stable) to be impacted by the fuel subsidy cut; the ratings already assume a certain degree of cyclicality in the auto sector.

In 2005, when the government raised the price of subsidised fuel by 88%, car sales dropped to a larger extent than motorcycle sales. In the 12 months after the subsidised fuel price was raised, car sales dropped 43% from the previous 12 months, while motorcycle sales only dropped by 12%.

More recently in 2013 when the government increased the subsidised fuel price by 44%, car and motorcycle sales were less impacted. In this instance, car sales managed to grow by 7% in the 12 months after the increase from a year earlier, while motorcycle sales rose by 11%. The growth in sales during this period reflected the introduction of low-cost green cars in 2013 and price discounting by auto retailers.

Fitch expects the upcoming round of subsidised fuel price increase to have a more severe impact on auto sales than in 2013 because of the slower economic growth. Fitch expects car sales to fall to a larger extent than motorcycle sales as consumers delay their car purchases and choose the more affordable motorcycles. Given the lack of public infrastructure, motorcycles are likely to remain the more popular means of transportation. Furthermore, competition is more intense in the car retailing segment, which has more players and more brands. The competition amid lower sales may also spur price discounting among the car retailers, which would compress their margins. (ends)