Indonesia: Oil trouble

Announcing bad news is always hard, but Indonesia's President Susilo Bambang Yudhoyono must have wished for a less symbolic moment to tell his people that fuel prices were going to have rise by around 30%. The government is set to announce the decision this Friday, a few days after the 10th anniversary of the protests -- largely triggered by cuts to fuel subsidies -- that toppled former president Suharto and ended his authoritarian 32-year rule.

Calculated decision

President Yudhoyono's decision is more calculated than Suharto's, but probably not much easier. His government is faced with balancing the relentless mathematics of surging crude oil prices against the economic fears of a largely poor population, set within the context of legislative and presidential elections in April and July 2009.

The macroeconomic case for the move is overwhelming. According to Finance Minister Sri Mulyani Indrawati, the government budgeted around $13.65 billion to cover fuel subsidies in 2008, based on an average price of $95 per barrel. This week crude oil tipped $130 a barrel, implying an annual subsidy of more than $20 billion, equal to 20% of total government expenditure. Further, other key staple prices -- notably rice, soy products and cooking oil -- have also soared in recent months, adding to the burden on the 50% of the country's 230 million people the World Bank recently declared to be living in poverty, or subsisting on less than $2 per day.

Protest risk

The last time the government cut fuel subsidies, which it argued then and argues now benefit mainly middle-class car drivers, was in 2005. The rise triggered widespread protests across the archipelago, but was not serious enough to shake the government. This time may be different, though demonstrations against the cuts that began last week have proved manageable. Moreover, business interests and foreign investors will welcome the move -- as long as it does not provoke too much disruption.

Yudhoyono's greatest test is to manage this difficult manoeuvre without jeopardising the outlook for growth. The most likely outcome of the price rises will be a smoldering truce -- albeit one that is set to reignite ahead of the next year's elections.