Adam Jarczyk, Asia Pacific Practice Leader for FSG, is currently on the road in Indonesia. He is speaking with government officials, senior executives and industry thought leaders to provide our clients with the latest on-the-ground insight from the market. He will be posting key takeaways on the Emerging Markets Insights blog.
Indonesia is not a country well known for its economic governance. But over the course of my trip to Jakarta this week, I have consistently heard positive comments about the ruling coalition’s handling of the recent fuel subsidy cuts. Although the move has already started creating challenges for companies in terms of heightened inflation and higher interest rates, there is broad agreement that the long-term benefits will be worth the short-term pain.
In particular, the executives I’ve spoken with are hopeful that the money the government is saving on fuel subsidies will be put to good use on badly-needed infrastructure projects and social programs. The benefits of spending in both of these areas are recognized by business leaders across industries, regardless of whether their operations would be directly affected. After all, these are two areas in which increased government spending has the potential to bolster Indonesia’s long term growth and create opportunities for all.
With that said, some executives did express consternation during our meetings about the prospect of rising inflation. With gas prices up 44% and diesel prices up 22% post-reform, many executives are wondering how quickly inflation will accelerate and how long it will last. The good news is that because the fuel subsidy reform was a one-off measure by the government, we are unlikely to see sustained price growth over the medium-term. According to the World Bank, inflation should peak near the end of this year at around 9% before dropping back down to current levels by the end of next year.
Executives who are wary of rapid price growth should sleep easy. A small bout of inflation is well worth the potential gains from Indonesia’s fuel subsidy cuts.