At last, the president himself has mentioned that the government will take necessary action in order to slash subsidized fuel cost this May and it will likely be informed of a two-tier fuel pricing system. Until this moment, the government is planning to set subsidized fuel price at Rp 6,500/liter for private cars whereas public transportation and motorcycle could still enjoy the original fuel subsidy at Rp 4,500/liter.
Indonesia Market Summaries view: If this policy is implemented, just as we have mentioned on our previous report, we estimated the impact on inflation will be around 1.0ppt-1.5ppt that could bring our FY13 inflation forecast to 6.4%-6.9% and save Rp54tn (0.6% of GDP) from 2013 budget assuming a full year implementation. We think the policy will trigger the central bank to hike its lower bound rate, so-called FASBI rate by at least 25 bps this year. Meanwhile, its impact on trade balance is likely to be limited, estimated to lower current account deficit by around 0.2% of GDP. We think, however, the effectiveness of the policy will depend on the implementation which will be challenging.