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Fuel price hike will be acid test for Indonesia

AMMAR MASTER | Updated on July 31, 2014 Published on July 31, 2014

Light vehicle sales will, however, weather the storm

Indonesia’s light vehicle industry has come of age and is poised to become Southeast Asia’s largest sales market by the end of this year. However, automakers and vendors rushing in with big ticket investments need to take stock of a few challenges in the market.

Changing reign

Foremost among these is Indonesia’s political situation which, after a decade of stability, will soon be tested under the new leadership of president-elect Jokowi Widodo. Yet to be proven in national politics, Widodo will have to address a number of issues ranging from widespread corruption to propping up the economy.

An important decision facing the new president will be on fuel subsidies. While Widodo’s election campaign had promised to reduce and fully deregulate retail fuel prices over the next four to five years, real action on the ground is likely to prove more difficult (although not impossible).

History indicates that reducing fuel subsidies has always been sensitive and sometimes politically disastrous as has been evident in countries like India too. For instance, the combination of fuel subsidy cuts, inflation and high food prices led to the downfall of President Suharto in 1998. The situation now is possibly more under control since policy makers have been preparing the public for an increase in fuel prices as subsidies are lowered.

Despite the pain it may cause to the general public, it is critical for Indonesia to further cut its fuel subsidies which have been a huge burden on the national budget. In 2013, fuel subsidies accounted for 19.5 per cent of the total government budget and 2.1 per cent of the GDP.

Essential cuts

The 2014 Budget includes about $20 billion worth of fuel subsidies. As a result, Indonesia’s Budget deficit is estimated at 2.5 per cent of GDP, higher than 2.38 per cent in 2013. The deficit also comes close to Indonesia’s set threshold of three per cent of GDP.

A possible increase in fuel prices is thus possible in the coming months, but we are not expecting a drastic impact of this on light vehicle sales since a 44 per cent price hike last year resulted in limited protests while its inflationary impact lasted about three months. Meanwhile, light vehicle sales in 2013 had grown 10 per cent to 1.11 million units. This growth is expected to be replicated this calendar with the light vehicle market projected to cross 1.22 million units. The volume through to May was up nine per cent to 486,000 units.

We believe the buying rush of the newly launched models and the Low-Cost Green Car models may be cooling down.

While the sales pace has been moderating, the underlying strength of the market appears to be intact, with falling inflation, steady interest rates, and solid wage growth supporting vehicle sales.

As for the negatives, the trade balance is slipping back into a deficit due to rising oil prices (read rising import bills) and falling exports. This has been a result of the government’s ban on exports of unprocessed minerals as well as soft global commodity prices and China’s sluggish demand. Also, the interest rate hikes last year appear to be having a delayed impact.

Going forward, Indonesia’s light vehicle sales are forecast to expand at a compounded annual growth rate of 6.8 per cent to near two million units by 2021. Positives include the country’s young and growing population, expanding middle class, very low vehicle density and an average annual GDP growth of 5.3 per cent in the next 15 years.

Undoubtedly, there are challenges to build a successful business in Indonesia, but its growth potential perhaps outweighs the risks in the market.

The writer is senior market analyst (ASEAN & India), LMC Automotive

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Published on July 31, 2014
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