The president confirmed that fuel price will be increased this May

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.