Moody's: Indonesia's fuel price hikes are credit positive for the sovereign and Pertamina

(November 19, 2014) -- Moody's Investors Service says that the Indonesian government's (Baa3 stable) decision to raise fuel prices is credit positive for both the sovereign and the country's energy major, Pertamina (Persero) (P.T.) (Baa3 stable).

For the sovereign, Moody's says the higher fuel prices are a positive signal of the government's commitment to broaden economic reform, and will translate into a material reduction in energy subsidies, which in turn will be instrumental in helping curtail the country's fiscal and current account deficits.

As for Pertamina, the higher fuel prices will be credit positive, as the reduction in fuel subsidies will lower the national oil company's borrowing requirements, improve its working capital position, and reduce potential losses arising from insufficient subsidy reimbursements from the government.

Moody's conclusions were contained in its just released report titled "Indonesia: Fuel Price Hikes Are Credit Positive for Sovereign and Pertamina".

Moody's report points out that while Pertamina does not incur any direct losses due to fuel subsidies, it has to fund them -- typically for a month -- until they are reimbursed by the government. Moody's estimates that a complete dismantling of fuel subsidies would lower Pertamina's annual borrowings by about $2 billion.

Moody's further points out that the rise in domestic fuel prices is likely to reduce excessive energy consumption, which will in turn reinforce the ongoing narrowing of Indonesia's current account deficit.

In addition, lower energy import levels will provide support to the Indonesian rupiah, at a time when the country continues to face external challenges, such as monetary policy normalization in the US, and a gradual slowdown in the Chinese economy.

The reduction in energy subsidies will also free up substantial additional fiscal resources for infrastructure and developmental expenditure; one of the key policy priorities of the new Indonesian administration.

Higher fuel prices are likely to raise inflation by the end of this year. However, Bank Indonesia's decision to raise interest rates in the context of the fuel price hike is likely to limit additional inflationary pressures in 2015.

Moody's report notes that the government raised retail gasoline prices by IDR2,000 or 30.8% to IDR8,500 per liter on 17 November 2014. At the same time, the authorities raised diesel prices to IDR7,500 from IDR5,500 per liter. According to Indonesia's Finance Minister, the fuel price rises will lower the sovereign's energy subsidy bill by about IDR100 trillion in 2015. (ends)