Indonesia mulls over IDR2,000 gasoline price hike

Even diesel prices might be raised.

According to DBS, once the impact of higher fuel prices can be offset for the poor, the government is likely to implement subsidized fuel price hikes soon after. 

At this point, the government is proposing to raise the price of gasoline from IDR4,500/liter to IDR6,500/liter and the price of diesel from IDR4,500/liter to IDR5,500/liter.

In simplified terms, the average price increase for subsidized fuel is around IDR 1,500/liter.

Here's more from DBS:

As mentioned previously, the fuel price hike is likely to have a significant impact on inflation, but a more muted impact on GDP growth.

Assuming that the fuel price hike takes place in June, CPI is expected to spike close to 8% YoY and inflation is likely to average around 7% in 2013.

In response, BI is likely to raise the FASBI deposit rate to anchor inflation expectations. Conversely, under a no fuel price hike scenario, we are expecting average inflation to reach 5.3% this year and there will be less urgency for BI to act on rates.

The impact of GDP growth is likely to be minimal. Fuel prices have been kept essentially unchanged since 2005 when fuel prices were increased by a cumulative 150% in that year.

In 2008, fuel prices were raised temporarily during the oil price spike, but the price hike was reversed by 2009. By examining the two periods in 2005 and 2008, it is quite clear that consumers can handle a 33% fuel price hike with minimal impact on private consumption expenditure.

Moreover, income levels have risen significantly since 2008 and consumers are now in a much better position to handle a fuel price increase.

Fuel price reforms have proved tricky and such was the case in 2012 when a planned fuel price hike was aborted due to protests. A similar situation could occur and it will again depend on the political will of the government to push through with the fuel reforms.