Fuel subsidy cuts just temporary Impact on autos

November 17, 2014, 10.29 PM | Source: The Jakarta Post
Fuel subsidy cuts just temporary Impact on autos

ILUSTRASI. Bakal calon presiden dari PDI Perjuangan Ganjar Pranowo (tengah) menyapa warga di GOR Gondrong, Kota Tangerang, Banten,


JAKARTA. 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 will likely not be materially impaired.

The government plans to cut its fuel subsidy bill by increasing subsidized fuel prices.

Fitch said such increases would drive inflation and keep interest rates high for at least the next 12 months.

"This is likely to impair consumer purchasing power and slow the demand for car and motorcycle purchases. With about two-thirds of car purchases in Indonesia funded by vehicle financing and higher borrowing costs would lead to car purchases being postponed," it said in a release made available to The Jakarta Post on Monday.

Fitch said it expected the reduction in auto sales to have only a short-term impact and sales were likely to recover along with the Indonesian economy. The faster the government was 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 on by the fuel subsidy cut; the ratings already assume a certain degree of cyclicality in the auto sector," Fitch said.

In 2005, when the government raised the prices of subsidized fuel by 88 percent, car sales dropped to a larger extent than motorcycle sales. In the 12 months after subsidized fuel prices were raised, car sales dropped 43 percent from the previous 12 months, while motorcycle sales only dropped by 12 percent.

More recently in 2013 when the government increased subsidized fuel prices by 44 percent, car and motorcycle sales were less impacted. In this instance, car sales grew by 7 percent in 12 months after the increase a year earlier, while motorcycle sales rose by 11 percent. 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 subsidized fuel price increases to have a more severe impact on auto sales than in 2013 because of slower economic growth.

"Car sales are expected to fall to a larger extent than motorcycle sales as consumers delay their car purchases and choose more affordable motorcycles. Given the lack of public infrastructure, motorcycles are likely to remain the more popular means of transportation," it said.

Competition is more intense in the car retail segment, which has more players and brands.

"The competition amid lower sales may also spur price discounting among the car retailers, which would compress their margins." (ebf)

Editor: Hendra Gunawan

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