Indonesia braces itself for a 45% subsidized fuel price hike

And it could happen on November.

Following the recent presidential inauguration of Joko Widodo (or most popularly known as Jokowi), replacing Susilo Bambang Yudhoyono as Indonesia’s new president, it has been noted that the road ahead will not be smooth for Jokowi and markets seem to have been reminded of this in the past month or so.

According to a research note from DBS, a fragmented parliament may remain a hurdle for the new government.

Meanwhile, Jokowi’s first task is to announce his cabinet. It has been widely anticipated that technocrats will dominate the key economic portfolios, but markets will also look at the cabinet appointments for any cues of political bargaining.

The cabinet line-up could also provide some clues to Jokowi’s commitment to strengthen institutional capacity in the economy, especially in areas such as legal, energy/resources and state enterprises.

Here's more from DBS:

Next on the agenda is the long-awaited subsidized fuel price hike. As much as a 45% price hike is anticipated and this may happen as early as November.

Such a move will help to save some USD 15bn of fiscal spending in 2015 and will also help to narrow the current account deficit. But such a move may also mean a lower GDP growth by about 0.4 percentage points in 2015.

It remains to be seen if Jokowi can get the approval from the parliament to spend the savings from fuel subsidy allocations on other needs, including infrastructure development.

The other aspect of the new government that we will closely monitor is its policy coordination with Bank Indonesia (BI). In recent months, there has been a wave of criticism, including from Jokowi’s circle, against BI’s tight monetary policy stance.

We believe that maintaining financial market stability is crucial for longer-term GDP growth potential, especially noting the adverse impact from a weak rupiah on investment growth since last year.

On this front then, the new economic team needs to show that it can work together with BI in implementing a sound policy mix ahead.

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