Indonesian Strategy, Fuel Price Hike Decision Likely To Be Decided By Voting, Citi

 Negotiation on fuel price hike to be completed this week; likely by 29 Mar voting
— Although the six factions (which control 75.5% of the 560 House Seats) agreed to
set the fuel subsidy at Rp137trn (US$14.9bn), which could clear the way for the
government to raise the price of subsidized fuel by 33% to Rp6,000/litre (not the first
time as fuel prices was at Rp6,000/litre in May-Dec 2008 and GDP still grew by 6.1%
YoY), the government still needs the approval of the House to revoke an article in the
law that governs the 2012 State Budget. The article states that the government cannot
raise the price of subsidized gasoline at gas stations. The decision is likely to be linked
to the voting being done on Thursday 29 March, but could drag on until right before the
expectation of fuel price hike on 1 April 2012. The government needs to get 50% + 1
vote to get approval from the parliament.


 Hike likely to go ahead but Golkar will again be a key card to get majority vote —
The opposition parties (PDIP, Hanura and Gerindra), who have a tendency to oppose
government moves, have mentioned their disagreement with the fuel price hike. On the
other hand, the Ring 3 coalition party (consisting of PKS and Golkar) are still not
decided and their decision could swing either way. We believe PKS will decide against
the fuel price hike and thus Golkar will play a key card. Without Golkar support, the
coalition party would only get 46.4% of the total vote, while with Golkar support it would
get 65.4% of the total vote (see parliamentary vote breakdown in Figure 2).

 Direct Cash Transfer is the main contentious issue — The main issue for other
political parties such as Golkar is on the direct cash transfer. The government will use
some of the money saved from the fuel subsidy hike to provide a direct cash transfer to
18.5m poor families at Rp150,000/month for nine months. This does not actually bode
well for the other political parties as it will raise the profile of Partai Demokrat and SBY,
especially amongst those low income families that receive the money (as previously
experienced in the past when the government provided direct cash transfer in 2005 and
2009 at Rp100,000/month – see Figure 3).

 Maintain positive view on the fuel price hike and also positive longer-term — We
view the government’s decision to increase the subsidized fuel price is positive longterm
as subsidy reform corrects the misallocation in spending (last year subsidy
spending was higher than capital spending). Fuel subsidy accounted for 19.8% of
government spending and 3.4% of Indonesia’s GDP in 2011 (see Figures 4 & 5). There
could be some impact on the inflation, but with rates still relatively low we think the
market will continue to perform well. We maintain our positive view on the market with
an index target for year end of 4,450. We continue to like BNI, Mandiri, Adaro, United
Tractors, Indomobil, Harum Energy, and Jasa Marga.

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