Price hike has little impact on inflation: ADB

JAKARTA. Indonesia will see limited cost-push inflationary pressures from the mulled adjustment in fuel prices, even if president-elect Joko “Jokowi” Widodo opts to hike the price of subsidized fuel by up to 50 percent, the Asian Development Bank (ADB) says.

Inflation may only surge to 6.9 percent next year, according to the ADB, which estimated its assumption based on a subsidized fuel adjustment of between 30 and 50 percent from its current price of Rp 6,500 (54 US cents) per liter.

“Our high inflation last year was mostly because of the restriction on horticulture imports and the delay in the fuel-price hike, which contributed to the build-up of inflation expectations,” Edimon Ginting, ADB’s chief economist for Indonesia, told a press briefing on Thursday.

He suggested the fuel price hike be undertaken sooner rather than later, especially as now commodity prices were still on a downward trend, thus limiting high increases in food prices if the fuel-price hike was implemented.

When the government hiked fuel prices by 44 percent in 2013, annual inflation surged to 8.4 percent, double the previous year. But the ADB argued that the case for next year would be different, especially as the incoming government had declared its intention to hike fuel prices as soon as possible.

When President Susilo Bambang Yudhoyono hiked the price of subsidized fuel in June last year it coincided with school admission season and was just days before Ramadhan, which is typically followed by surging food prices.

The fuel-price hike was also implemented a month after the US Federal Reserve first signaled its intention to tighten its monetary policy, which caused investors to pull their funds from emerging economies such as Indonesia.

Next year, the Fed is expected to hike its interest rate between March and June, with many analysts fearing that the US central bank’s move could trigger another rout in the global economy.

The new government should hike fuel prices before February next year at the latest, Bank Indonesia (BI) Senior Deputy Governor Mirza Adityaswara said.

Mirza said that the current BI rate of 7.5 percent might already be sufficient to counter the inflationary pressure of a Rp 2,000 per liter adjustment in fuel prices, though he noted that the benchmark BI rate “certainly will not go down very soon” due to rising external risks.

Jokowi’s team has stated the fuel-price hike could take place in November this year at the earliest, at between Rp 1,000 and Rp 3,000 per liter.

“The timing for the fuel-price hike must be right,” said ADB’s Edimon. “If it is implemented at the right moment, then the impact could be almost unnoticeable.”

Economists from Morgan Stanley predicted that every 10 percent hike in retail fuel prices would add between 0.7 and 0.9 percent to headline inflation, while those from UOB said that a 20 to 30 percent hike in fuel prices could drive up inflation to around 6 to 7 percent.

The ADB forecast Indonesia’s economic growth would hit 5.8 percent next year, compared to its forecast 5.7 percent this year. The current-account deficit, the major worry among investors, would improve to 2.5 percent of GDP from a forecast 2.9 percent this year, according to the Manila-based organization.

“[Indonesia’s] economic condition is predicted to recover in 2015,” the ADB wrote in its report, titled Asian Development Outlook Update 2014.

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