Indonesia’s stock market rose to a new all-time high on hopes that incoming President Joko Widodo will soon remove one of the biggest drags on the economy.
An aide to Widodo told Bloomberg in an interview that the government may raise subsidized fuel prices as early as next month, with a view to freeing up budget funds for more productive uses such as investments in infrastructure.
“We can’t avoid this solution” because we are unable to find other ways to boost revenue in the short term, Boomberg quoted Arif Budimanta as saying.
“Previously, we expected a price increase this month under the current government, but the current government can’t do it. Maybe we can do it in October or November,” he added.
Widodo is due to take office in what is on October 20, after successfully seeing off a legal challenge to his election victory over Prabowo Subianto in July.
Indonesia, which is the world’s largest Muslim nation and the biggest economy in South-East Asia, currently spends $21 billion a year on keeping retail fuel prices low, over 12% of all its budget revenue.
Efforts by the previous president Susilo Bambang Yudhoyono to cut the subsidy had sparked riots last year. and Widodo, also known locally as Jokowi, has said he would only raise prices gradually, aiming to head off resistance from a car-driving middle class that benefits most from the subsidies.
The Jakarta Composite Stock Index has risen 24% this year on hopes that Widodo will be able to stop the rot in Indonesia’s budget and current account balances that have made it one of analysts’ “Fragile Five” emerging economies, most vulnerable to the imminent upward turn in U.S. interest rates.
The improvement in investor confidence has also been evident in the bond market this week. Reuters reported that the government gathered $10 billion in orders for a new Islamic bond, or sukuk, over six times more than the $1.5 billion it wanted to sell. As a result, the government is paying only 4.35% on the bonds rather than the 4.65% expected at the start of the week.
Budimanta also said the government would raise its growth forecast for next year to 5.8% from the current 5.6%. The IMF expects growth of only 5.4% this year, the slowest since 2009.
In the medium-term, Budimanta said, the govenrment is aiming for growth of between 7% and 8%–a level not seen since before the 1998 Asian financial crisis.
