Joko Widodo to cut Indonesia's $21bn fuel subsidy bill 'gradually'

Joko Widodo, Indonesia's president-elect, has warned that he will only cut the country's $21bn fuel subsidy bill gradually and that the extra funds will be channelled to other programmes designed to help the poor.

Mr Widodo, who was elected on Tuesday after beating rival Prabowo Subianto, told the Financial Times that investors should not expect a drastic change in fiscal policy when he replaces outgoing President Susilo Bambang Yudhoyono in October.

"I know that we have a huge fuel subsidy bill that has to be addressed but it must be done gradually," the Jakarta governor said, in his office at city hall. "We need to move investment to more productive activities that help poor families, for example irrigation for farmers, fertiliser subsidies and improving public transport."

Mr Widodo will receive an empty wallet when he takes over leadership of southeast Asia's biggest economy. The budget deficit is closing in on 3 per cent of economic output amid falling revenues, economic growth hitting a five-year low and the bill for subsidised fuel, which accounts for 13 per cent of all government expenditure this year, continuing to rise.

Foreign investors and economists have repeatedly urged the Indonesian government to slash the ever-growing fuel subsidy and redirect the investment to more productive areas such as infrastructure and agriculture that could potentially boost growth and help reduce the deficit.

Mr Yudhoyono belatedly raised petrol prices by 44 per cent last year to a still low Rp6,500 ($0.56) a litre, compared with the UK's roughly $2.21 and the US's $0.77. But he has been reluctant to reform the subsidy for fear of alienating the middle-class voters who benefit the most from it.

Indonesia's markets were among the worst hit when the US first said it was planning on scaling back its monetary stimulus last year amid concerns that a reverse in flows could further damage its fiscal and current account shortfalls.

Portfolio investors see Mr Widodo's approach to the fuel subsidy as an important early test of his leadership, after he pledged to take action while on the campaign trail. As with Narendra Modi, the recently elected prime minister of India, they want to see evidence that he can deliver swiftly on high expectations for economic reform. Mr Modi's maiden budget lacked details on how India's subsidy bill would be pared down.

"Investors have already priced in another hike in the fuel price and if that were not to happen, there could be a problem," said Daniel Hui, an Asian currency strategist at JPMorgan.

With the World Bank forecasting a budget deficit of 2.8 per cent this year, close to Indonesia's 3 per cent legal limit, Mr Widodo will be under pressure to tackle the problem quickly.

The 53-year-old former furniture salesman and mayor in Solo, his home town, said he hopes to shave 20-30 per cent off the government's running costs through efficiencies and aims to increase tax revenue by accelerating the shift to an online payment system.

But Mohammad Ikhsan, an economic adviser to outgoing vice-president Boediono, warned that Indonesia's tightening fiscal position required more than a fuel price rise and tinkering with the tax system.

"We have to reform the tax system but we need a revolution to take the middle class from being subsidy receivers to taxpayers," he said.

A pragmatic and gradual reformer in local government, Mr Widodo is aware of the limitations of dealing with a large, inefficient bureaucracy.

To fund Indonesia's development needs, he said he wants to improve the climate for foreign investment, which has been damaged by a rising tide of protectionist policies.

"We need to be open for foreign investment, most importantly in manufacturing and industry because they can create jobs," he said.

He is also considering a plan to attract capital by allowing foreigners to buy apartments with long-term leases.

But, after discussions with many international investors, Mr Widodo said that their main requests were to simplify the byzantine licensing procedures and improve the often problematic land acquisition process.

"This is my job," he said. "How to make it easier to get permits and give them support to manage land acquisition." 

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