Insight

Chasing the scooter vote: fuel subsidies in Indonesia's political economy

Energy & Commodities
  • The failure of the Indonesian government to implement planned reform of Indonesia’s massive retail fuel subsidies this month leaves Indonesia spending almost as much in subsidising vehicle use as it does building the roads to drive them on. In 2012 these subsidies are likely to consume at least 13% of Indonesian government spending.
  • The uprating of Indonesia’s debt to investment grade – the first such rating in the emerging world – in early 2012 was an explicit seal of approval for growth rates averaging 6% and a generally cautious fiscal stance. The fuel subsidy is by far the most important black mark on this record, and it is proving hard to erase.
  • Both for inward investors in Indonesia and for increasingly enthusiastic index-linked investors in Indonesian equities, this is a sign of the potential problems ahead. After a decade of relative consensus on incremental reform in Indonesia, the fuel subsidy debate and the approaching 2014 Presidential election signal a shift to a period in which democratic politics is likely to act as a check on needed reform.
  • The parallels with India, where investors are increasingly voting with their feet, are interesting. Indonesia’s fiscal governance is notably better, but its democratic politics exhibit some similar traits.   

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