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Ajay Makan is a former FT reporter who writes about energy, finance and economics.
South-east Asia has been ground zero for the global energy crisis since the US and Israel attacked Iran two months ago. Low domestic oil production, a paucity of reserves and heavy dependence on imports from the Gulf have left the region painfully exposed, prompting governments to take dramatic rationing and demand destruction measures.
The Philippines, which depends on imports to meet 95 per cent of oil needs, has been under particular scrutiny. In the wider Asian neighbourhood, some investors have also become a little worried about India, with even Narendra Modi now having to ask his citizens to limit energy usage, overseas flights and gold purchases to help the country preserve its foreign reserves.
However, that seems to have taken attention away from Indonesia, the ASEAN region’s economic giant and thus a much larger threat to global stability. Indonesia has actually seen its currency fall more sharply against the dollar than any other major ASEAN currency but the Philippine peso, and on par with the slump in the Indian rupee.
Yields on its sovereign debt have also soared, forcing the government to announce an emergency bond stabilisation fund in a bid to stop the rout.
Unlike the Philippines, Indonesia’s problems are almost completely of its own making: a fuel subsidy regime that is a relic of Indonesia’s days as an oil exporter and OPEC member. This keeps prices for petrol and diesel among the lowest in the world, even though the country is now a major importer.
When oil prices jump as they have in recent months, that leads almost inevitably towards a fiscal crisis. Indeed, you could easily argue that Indonesia’s fuel subsidy regime is a candidate for the worst ageing in the world.
The recent sell-off in Indonesian bonds was prompted by a promise by the finance minister at the start of April that gasoline prices would not budge from the current rate of $0.60 per litre, which is around half of US prices and far below what the state energy company Pertamina pays to get products to the pump.
(NB, in case you click on that link you’ll see that Global Petrol Prices gives Indonesia’s price as $0.72. That’s because it compares global prices for high-quality Octane-95 gasoline. Indonesia’s benchmark fuel is Pertalite, an Octane 90 fuel, which has been sold at 10,000 Indonesian rupiah since 2022, or around $0.60.)
Instead, Indonesia’s finance minister has promised to spend an additional $5.9bn on energy subsidies this year, on top of $22.5bn allocated last September, which was already almost 10 per cent of the 2026 budget. To fund this, he promised aggressive — and potentially unrealisable — 10 per cent cuts across government ministries, but still acknowledged the 2026 deficit would be far higher than forecast.
The promise of spending cuts was not enough to reassure bond investors, who still remember 2022. The last time Brent prices topped $100 per barrel, Indonesia spent a gigantic $35bn subsidising oil demand alone (ignoring all other energy subsidies). That was second only to Iran, according to the IEA’s database of fossil fuel subsidies, which looks at the gap between published consumer prices and market rates.
Looking only at net oil importing nations — those for whom the IEA says domestic crude oil production is less than 100 per cent of total crude supply — Indonesia’s 2022 oil subsidy was by the far the largest as a share of GDP, and many orders of magnitude greater than India or China, whose larger economies and government budgets can sustain more spending.
And here’s the crucial point worrying investors. Indonesia’s colossal $35bn outlay on oil subsidies in 2022 came even after the then government raised fuel prices by up to 30 per cent to limit damage to public finances. Pump prices have not been increased since then, and throughout April Indonesian ministers have reiterated the promise that they will not.
The alternative, the finance minister told Bloomberg, would be civil unrest:
If we remove the subsidies, inflation will increase, the cost of capital will increase . . . There will be more protests on the streets, which will lower economic growth quite significantly. It’s a very risky policy.
On the measure of inflation alone, the price fix has been a success. Indonesia’s yearly CPI was just 2.4 per cent in April, compared to 7.2 per cent in the Philippines. But fixed prices are worsening Indonesia’s crisis in other ways.
With gasoline still at 60 cents per litre — and falling in dollar terms as the local currency, in which fuel prices are set, weakens — consumers have no price signal to reduce consumption. That undercuts the government’s otherwise desperate attempts to reduce demand and its spending on subsidies by limiting public sector working hours and how much fuel individuals can purchase each day.
The basic lesson of any subsidy regime is always: don’t start one. They distort demand and are politically incredibly difficult to exit.
Foreign currency reserves may allow Indonesia to defend its price cap through a prolonged closure of the Strait of Hormuz. But if the government fails to raise prices — as its predecessors did in previous oil crises in 2022, 2013 and 2008 — it may find investors less willing to support it even after the waterway reopens.
One might even say that . . . Indonesia is at a crossroads.
