Download Policy responses to high and volatile oil prices

The World Bank Group in Indonesia
Poverty Reduction & Economic Management
Indonesia post $100 per barrel:
The impact of oil & gas prices on public finances
Wolfgang Fengler and Tim Bulman
World Bank Institute:
Oil Price Volatility, Economic Impacts, and
Risk Management in Asia
Wednesday, June 4, 2008
Outline

Indonesia during high and volatile oil prices

Energy subsidies, the budget and the
lessons of the 2005 price adjustments

Challenges and options going forward
Indonesia post US$ 100 per barrel:
Four “confusing facts”
1.
2.
3.
4.
Since 2004, Indonesia has become a net importer
of oil but it remains a net exporter of energy
Despite record high oil prices - oil and gas
revenues have been hardly increasing
High oil prices remain positive for Indonesia's fiscal
position - but negative for the central government
Although fuel subsidies are rising rapidly, electricity
subsidies have been increasing even faster
Outline

Indonesia during high and volatile oil prices
Despite high oil prices revenue from
oil and gas has hardly increased ...
Indonesian Government Revenue
1,000
Total central gov't revenues
Non-oil and gas central gas revenues
Oil and gas central gov't revenues
Trillion Rupiah
800
600
400
200
0
1994
1997
2000
Source: Ministry of Finance (constant 2007 rupiahs)
2003
2006
… because production has been
falling sharply
Indonesian Crude Oil (Production and Price)
IDR /
barrel
Kbpd
Price
Output
(RHS, adjusted for
exchange rate)
(LHS)
1200
650,000
900
400,000
600
150,000
2008*
2007*
2006
2005
2004
2003
2002
2001
2000
Source: Ministry of Finance
Indonesia’s has adjusted gasoline
prices but is still trying to catch up
with world prices
10000
US price
Rp per liter
8000
6000
4000
May-08:
33% increase
Indonesia
2000
Link with world prices
0
2000
2002
Mar-05:
33% increase
2004
Sep-05:
88% increase
2006
Sources: U.S. Department of Energy; CEIC; World Bank staff calculations
2008
0
Gasoline prices in selected countries, US$/Litre - May, 2008
Turkey
Germany
United Kingdom
Hong Kong
South Korea
Singapore
Japan
Cambodia
Philippines (Cebu)
Thailand
India (Bangalore)
United States
Timor
Vietnam
China
2.5
Indonesia (end May)
3
Malaysia (Kuala Lumpur)
Indonesia (early May)
Venezuela (Caracas)
US$/Litre
Gasoline prices in Indonesia
remain among the lowest in the
world
Administered price
Automatic/market price
2
1.5
1
0.5
Energy subsidies will reach a new record
high in 2008
Energy Subsidies in Indonesia
5%
20%
Percent of central gov't
spending (RHS)
APBN-P
16%
Percent of GDP (LHS)
3%
12%
APBN
2%
8%
1%
4%
0%
0%
2004
2005
2006
Source: Ministry of Finance and World Bank staff calculations
2007
2008
% of central govt
spending
% of GDP
4%
Fuel and electricity subsidies represent significant
share of national budget
Transfers to
regions
29%
Other spending
10%
Fuel subsidy
13%
Subsidies
24%
Interest
10%
Capital
9%
Material
5%
Source: Ministry of Finance
Personnel
13%
Electricity
subsidy
6%
Other
subsidies
5%
Outline

Energy subsidies, the budget and the
lessons of the 2005 price adjustments
High and volatile oil prices
undermine the budget process
Indonesian Government Oil Price Projections
Rules on transfer of
funds to sub-national
governments create an
incentive to underproject oil prices
120
Realized
US$ per barrel

*
90
Projected
60
30
0
2001 2002 2003 2004 2005 2006 2007 2008
* May 2008 projection.
Source: Ministry of Finance
Energy subsidies:
Crowding out productive spending
Energy Subsidies & Indonesian
Government Spending
120
90
US$, billions
Other
Sub-national transfers
Energy subsidy
Capital investment
Social spending
Energy subsidies dominate 2008
central government spending
US$ billion
21
Electricity*
14
60
7
30
0
2005
2006
2007
Sources: Ministry of Finance, World Bank staff
calculations
2008
(initial)
2008
(revised)
Fuel*
0
Subsidies
*Assumes ICP oil at US$95.
program expenditure.
Capital invest't
Social programs
2008 APBN-P; 2008 APBN for social
Source: Ministry of Finance
Regressive fuel subsidy
50%
Share of fuel subsidy received directly by households
40%
30%
20%
10%
0%
Poor
1
2
3
4
5
6
7
8
Household consumption decile
Sources: SUSENAS 2007 and World Bank staff estimates
9
10
Rich
Regressive electricity subsidy
Share of subsidized electricity connections
by household consumption level
The inflationary effect of fuel subsidy
cuts was significant but short-lived
150
%
Headline
120
90
60
Food
30
Core
0
-30
Fuel prices
30%
rise:
2004
Source: BPS
2005
120%
2006
30%
2007
2008
Impact of subsidy cuts on GDP
and household consumption
GDP & Private Consumption
Real, annualized seasonally adjusted
(quarterly percentage change)
10
GDP
Private consumption
Price increase
30% 120%
8
%
6
4
2
0
2004
2005
2006
2007
Sources: BPS, World Bank staff estimates of seasonal factors
2008
High subsides are related to
increasing borrowing costs
%
Bond Yields and Fuel Price Gap
USc
/L
Domestic 5-year
bond yields
12
(%; LHS)
40
8
20
US-Indonesian petrol
price differential
(US cents/litre; RHS)
4
2003
0
2004
2005
2006
2007
2008
Sources: CEIC; US Department of Energy; World Bank staff calculations
Minimize the costs:
Transitory compensation
Coverage of the Poor in Selected
Cash Transfer Programs
8.9%
10.8%
6.3%
20.5%
Brazil Bosca Escola
Mex-Oportunidades
Outline

Challenges and options going forward
Indonesia 2009-2014: Fuel subsidies
remain the defining policy issue


If oil prices stay at current levels, fuel subsides
will remain the defining policy issue of the next
government (2009-2014)
There are three broad options:
(i) Keeping subsidies unchanged (or only modestly adjusted)
(ii) Gradual closing of gap between domestic and world market
prices
(iii) Radical adjustment: Increase of fuel prices to market rates
Indonesia 2009-2014:
Options for fuel subsidy adjustment
Advantages
Disadvantages
Option 1: No or
limited change to
energy prices
Limited social and
political upheaval
Fiscal risks and lost
opportunity for public
investment
Option 2: Gradual
closing of gap to
world market prices
(2 scenarios)

Certainty of
removing subsidies
 Gradual increase
of fiscal space

Option 3: Radical
adjustment

Realistic pricing of
energy
 Maximizing fiscal
space

Continuous increase of
energy prices over a
prolonger period
 Subsides remain high
until 2010/2011
Social and political
upheaval
 Substantial economic
downturn (short-term)
Indonesia 2009-2014: Fuel
subsidies adjustment scenarios
A Scenario for Gasoline Prices
Rp per litre
16,000
13,000
Economic cost
Immediate
deregulation
10,000
Close 8% of the
gap per month
7,000
4,000
2008
No change
Close the gap
by Dec. 2010
2009
Source: World Bank Staff scenario
2010
Increase the price
50 Rp/mth
2011
Thank you
Terima-kasih
Policy ‘solutions’ that are not an
option:
Scaling back other spending
 Borrowing to fund fuel subsidies
 Rescheduling foreign debt
 Imposing a windfall profit tax on oil
companies
 Improving the efficiency of SoEs

Legacy of uncertain investment climate means
Indonesia not benefiting from today’s high
prices




Government receives 85 percent of production profits
Domestic market obligations at nominal prices
Uncertainty re: relevant rules and how they would be
applied
Overhang of institutional uncertainty means
Indonesia getting less than the potential benefit of
high oil prices
GoI Policy Measures






Optimalize non-oil tax revenue [Rp 20 trillion]
Cut line-ministries’ spending [Rp23 trillion] and use the
contingency fund [Rp8,3 trillion]
Increase bond issuance: Gross Rp157 trillion. But higher
yields
Increase program loans from multilateral and bilateral
institutions [Rp25 trillion]
Increasing oil lifting : 916  927 thousand KL
Energy savings (Kerosene to LPG conversion program, cut electricity
consumption, cut domestic fuel consumption, increase efficiency of
Pertamina, restrict access to subsidized fuel via ‘Smart Card’, Energy
savings in government buildings, private offices, malls, hotels
Policy responses to high and
volatile oil prices: The way forward

Maximize the benefits
 Create investment-friendly environment
• Encourage exploration
• Enables full exploitation

Minimize the costs
 Move from subsidizing energy to compensating declining real
incomes
 Take energy price decisions out of the political boiler
• Rules that gradually move retail prices towards the economic costs,
not political discretion
• Build public confidence in gov’t spending
• Compensate the poorest for the transitory income loss
• Spending programs that benefit the middle classes

Cut energy usage