|
Indonesia's trade position is much more resilient today
against skyrocketing oil prices. But still, expensive oil exposes the
economy to risks that are clearly undesirable.
As widely reported, the prices of benchmark crude oil recently reached
a record high of over US$93 per barrel following continuing supply
concerns amid heightening tensions in the Middle East.
Given declining global production and rising demand from China, it's
admittedly difficult to envisage a scenario where high oil prices
aren't here to stay. This leads us to one important question: how will
Indonesia's economy be impacted by soaring oil prices? Should we cheer
or jeer?
Thus far, accounts from various sources quoted by the media have been
conflicting and are often confusing for the average individual.
On one hand we have officials emphasizing the oil profit windfall and
downplaying the potential threats, while on the other hand skeptics
seem to have been scaremongering over the prospect of a depreciating
rupiah, wider budget deficit and rising inflation.
Which views should we accept? First, let's discuss the exchange rate
outlook. Why is it that we haven't seen the rupiah going into free fall
to the same degree as seen back in 2005 when oil prices surged to then
record highs?
Back then, Indonesia was a net oil importer, and higher oil prices led
to a deterioration in the country's trade balance. This, in turn,
precipitated a weakening of the rupiah, which was exacerbated by an
outflow of foreign capital from the domestic bond market.
Today we're still a net oil importer. In fact, August data shows the
oil-trade deficit amounting to US$5.4 billion this year, a 5 percent
increase from 2006. However the situation for the overall trade balance
has changed. Prices of non-oil commodities have also been rising. This
is beneficial since Indonesia is a net exporter of non-oil commodities,
e.g., coal, palm oil, tin, etc.
The figures show that since 2005, the trade surplus in non-oil
commodities has widened by an extent that is greater than the
deterioration experienced in the oil-trade deficit. Up to July 2007,
the excess of the former over the latter amounted to around US$1.5
billion per month by our count, up from just $850 million in October,
2005.
However, this doesn't mean we are immune from exchange rate
fluctuations. The currency is still exposed to risks arising from
capital flight. A rise in inflation expectations as a result of surging
oil prices could cause bond yields to rise and trigger a sell-off on
the bond market.
As historical data shows, rising yields in the bond market are highly
correlated with swings in the exchange rate. Any sell-off by foreign
investors would naturally be negative for the rupiah.
So, just how high is the inflation risk and chances of another domestic
fuel price increase taking place today?
Many relate this to the resilience of the government's fiscal standing.
In this regard, some misperceptions should be straightened out. Does it
really matter whether rising oil prices widen or improve the budget
deficit, or if the subsidy spending exceeds the budget target?
As long as there's political will, the numbers in the budget can
obviously be changed to suit prevailing conditions. We've seen this
happen before. In 2005, the fuel subsidy budget was revised not once,
but twice at the end of the year to accommodate pressure from oil
prices.
And even if one thinks the deficit is an issue, the government could
always "reprioritize" its expenditure account to prevent the deficit
from swelling. Again we saw this happen in 2005.
So, budget resilience doesn't seem to be the key risk here. Then what
is? In our view, it's the scarcity risk!
The amount of the subsidy paid on every liter of fuel sold to
households rises along with the upward trend in international crude oil
prices. Once this amount reaches a certain point, many will find it
very profitable to hoard, smuggle or illegally redirect sales of
subsidized fuels to the industrial sector.
Substantial diversions of domestic supply could lead to fuel scarcities
on the streets, a potential source of instability that can only be
effectively addressed by one thing: reducing the disparity between
subsidized and non-subsidized fuel prices, which logically can only be
achieved by increasing the prices of the former.
At what point will the scarcity risk become acute? Much will depend on
the effectiveness of law enforcement. But in 2005 -- right before
scarcities led to an increase in fuel prices -- subsidized diesel was
selling at around Rp 3,300 per liter less than unsubsidized diesel.
Today, the gap is Rp 2,700, but this is rising.
So, regardless of what the official accounts say, is there a risk of
oil prices being hiked? Yes.
Many say there are two sides to every story. There certainly is. But
unfortunately we haven't much space to discuss the benefits of rising
prosperity in commodity-producing regions. Nor is there room to analyze
the benefits of the faster increase in foreign reserves at the central
bank as a result of the bigger trade surplus.
At the end of the day, it all comes down to whether or not we will be
willing to see the current economic recovery put on the line by the
uncertainties arising from surging oil prices.
Regardless of improvements in the trade balance and despite what many
say about the budget, a fuel price hike may be lurking around the
corner. Oil at $100 would definitely bring that corner closer.
|
