Indonesia's Yudhoyono Gets Help From Oil Before Polls

By Berni Moestafa and Arijit Ghosh

Aug. 15 (Bloomberg) -- Indonesia's fuel-subsidy bill may be almost cut in half next year, giving President Susilo Bambang Yudhoyono more to spend on health and schools ahead of elections.

The cost of capping fuel prices is expected to fall to 101.4 trillion rupiah ($11 billion) from an estimated 180.3 trillion rupiah in 2008, Yudhoyono told parliament in Jakarta today. Oil is predicted to cost an average $100 a barrel for next year's budget, which is forecast to post a deficit of 1.9 percent of gross domestic product.

The deficit target ``indicates an expansionary period'' in the political cycle, said Eric Alexander Sugandi, an economist at Standard Chartered Plc in Jakarta. ``The government is spending more to boost growth and reduce unemployment prior to the elections.''

Indonesia's first directly elected leader is struggling to meet his pledge to reduce the poverty rate in Southeast Asia's most populated nation by half to 8.2 percent by 2009. Yudhoyono, eligible for re-election next year, has seen his popularity wane after higher global oil prices forced the government to increase local fuel costs in May to prevent a budget blowout.

A 23 percent decline in crude oil prices from July's record $147.27 a barrel will reduce the amount Yudhoyono has to pay out to keep fuel affordable for the nation's poor. About 15.4 percent of Indonesia's estimated 222 million people were still on incomes below the government's poverty line as of March.

Education, Health Care

Indonesia will spend 20 percent of next year's estimated 1,122.2 trillion rupiah in total budget outlays on education, the first time a government will meet a constitutionally mandated level. Spending on health care will increase from 16 trillion rupiah in 2008.

Yudhoyono is boosting welfare spending as his government prepares for parliamentary elections scheduled for next April.

The government will provide scholarship for children of families affected by the May fuel prices increase and raise salaries of teachers and build new schools as part of its attempt to improve education quality, the president said.

``The strategy I have laid down is growth with equity,'' Yudhoyono said in the speech on the eve of Indonesia's 63rd Independence Day.

Indonesia's economic growth unexpectedly accelerated to 6.4 percent in the second quarter as rising prices and demand for the nation's coal, palm oil and rubber pushed exports to a record. Economists expected a 6.1 percent gain.

Free Stoves

The government, seeking to avoid another fuel-price increase before the elections, is encouraging the nation's 35 million poor to reduce their kerosene consumption.

To control subsidy costs, ``the government will expedite the program of converting kerosene to liquefied petroleum gas,'' Yudhoyono said. The government will keep amending its subsidy policy ``based on current developments of global oil prices.''

State oil company PT Pertamina has distributed free LPG stoves to 9.34 million low-income families and small businesses as part of the drive to replace the more expensive kerosene as a fuel for cooking. That's 22 percent of the overall target aimed to be achieved in 2011.

The program may reduce consumption of kerosene in Indonesia by a third, the government estimates.

Still, economists said Yudhoyono's government may have difficulties in achieving a budget deficit next year of 1.9 percent of GDP, the same level estimated for 2008, unless crude oil declines further.

``It's too soon to expect oil to average $100 a barrel next year because that would mean the price would have to fall below that,'' said Anton Gunawan, chief economist at PT Bank Danamon Indonesia in Jakarta.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Berni Moestafa in Jakarta at bmoestafa@bloomberg.net