Oil price rally could be fiscal threat for Indonesia: Citi analysts

INDONESIA is among the most vulnerable emerging Asian economies amid the recent supply-driven surge in oil prices, according to a team of Citi analysts in a recent report.

Government fuel subsidies may have concealed the impact of inflation and led to fiscal risks in Malaysia and Indonesia, the analysts added.

They estimated that oil-led direct subsidy cost over-runs in the Indonesian Budget stand at about 0.7 per cent of gross domestic product (GDP).

"We don't expect fiscal slippage this year as government has room to cut spending . . . to be able keep the 2.1 per cent of GDP deficit in check," the analysts said.

But, with fuel-related subsidy costs assumed to be booked by state-owned enterprises (SOEs) to the tune of 0.5 per cent of GDP, this "could pose future fiscal risks as strains on SOE profits eventually lead to government capital injection".

The impact of rising oil prices would be most severe in Indonesia, India and Philippines, said the Citi team. "In each instance, the rates market is affected not only by the inflationary and fiscal implications, but also by expectations for policy measures to limit currency depreciation.

"Together with the large negative carry involved, this makes it difficult for investors to hold bearish FX (foreign exchange) or rates positions for anything except tactical trading horizons."