By the Blouin News Business staff

Indonesia’s economic election: cut the ballooning fuel subsidy

by in Asia-Pacific.

Indonesian Presidential candidate Joko Widodo in Yogyakarta. AFP/Getty Images

Indonesian Presidential candidate Joko Widodo in Yogyakarta. AFP/Getty Images

Indonesia’s $878 billion economy is Southeast Asia’s largest. As it is scheduled to hold presidential elections in less than a month on July 9, global investors and analysts will be watching closely in order to get a better feel for where the country – along with its influence in the region – is headed. Campaigning for the high government position began the first week of June with two contenders going head-to-head: former military general Prabowo Subianto and Jakarta governor Joko Widodo. They differ in many areas however both politicians share a similar economic view: that state intervention plays a positive role and the pair have expressed their desire to establish more market-friendly policies. Yet the one main concern for both should be to cut the ballooning fuel subsidy program which is ineffective and has brought plenty of headaches.

This economic approach could be a good way for the country to solidify its decade-old economic success based on high consumption and an abundance of natural resources. (Indonesia is the world’s biggest exporter of power-station coal, nickel, tin and palm oil and home to the world’s biggest gold mine and recoverable copper reserve). However, recent lower-than-expected numbers have raised some concerns: in the first quarter of the year, Indonesia’s economy grew 5.2%, its slowest pace in more than four years, down from 5.7% in the fourth quarter of 2013 (the country grew 5.8% last year). The lowering growth rate creates a toxic mix with the government’s other reality  that it is surrounded by deficit: a budget one which stood at 2.2% of gross domestic product and a current account deficits at 2.06% of GDP in the first quarter.

These challenges are created by other major ones that have taken over the world’s 10th-largest economy and the fourth-most large populated nation (not to mention the most populous Muslim country in the world). The existence of a high fuel subsidy program must be tackled through a reform of the energy sector. In Indonesia how much state budget funding is allocated to what sector is a big economic-political battle. The government approved $16.5 billion – from a total budget of about $95 billion – to fuel subsidies in 2013, and spent an extra $2 billion due to higher oil prices (in 2014 it budgeted $18 billion). That reality leaves little budget money left for other national priorities – the health sector only receives 3% of the total state budget – including the pressing need for infrastructure projects. A solution many are arguing would serve Indonesia is raising fuel prices which would then reduce demand for government-funded fuel (the current government’s last price increase happened a year ago).

After two five-year terms, the presidential incumbent, Susilo Bambang Yudhoyono, is constitutionally barred from seeking a third term and will leave office in October. What comes after that will be key for the country’s economic success. If the current account deficit were to reach 4.4% of GDP — the level it reached in April-June 2013 – the risks it would carry would be great. With global developments likely to take place in the upcoming months that will have an effect on the national Indonesian economy, such as the United States raising its interest rates, reducing the deficits and fuel subsidy should top the economic program both candidates are presenting to their electorate.