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Asian fuel price rises unlikely to spark unrest PDF Print E-mail
Wednesday, 28 May 2008

REUTERS, SINGAPORE/JAKARTA- Leaders across Asia are starting to give in on the prickly issue of fuel subsidies, hiking prices in the face of $130 a barrel oil, but careful calibration of the steps may allow them to get away with it.

Indonesia jacked up fuel prices by an average of 28.7 percent from Saturday, Sri Lanka followed with its own increase on Sunday and Bangladesh said it planned an increase soon.

India is also considering such a move. The odd man out is China, which has strong finances and has said it does not plan to raise prices soon.

While the increases will be difficult to swallow, especially for governments with approaching elections such as India and Indonesia, social disruptions such as those seen due to food shortages will probably be avoided, analysts said.

For one thing, fuel does not have the same impact with lower-income people as food.

"Food is so immediate and obvious," said Steve Wilford, India country manager for consulting firm Control Risks.

"In countries that have a recent memory of famine ... it's such an emotive subject that governments can't ignore the immediate impact of rapid food price hikes in the same way as they can with fuel price hikes."

In addition, accompanying the hikes with mollifying steps can cushion the blow.

Indonesia has twinned the fuel price hikes with some $1.5 billion in cash handouts for the poor.

India may try to limit increases in prices for fuels used by the poor, such as kerosene, while also not giving too big a hit to middle-class voters through dearer gasoline, said Wilford.

Some policymakers are also aided by an awareness among their populations of the reality of sky-high global prices.

LESSER OF TWO EVILS

That is generally the case in Taiwan, which has said it will end a freeze on prices of fuels and utilities on June 1, said Raymond Wu, managing director of Taipei-based political risk consulting firm e-Telligence.

"These utility price hikes are expected, from cement to food, so people psychologically are expecting an increase," Wu said.

Still, the potential impact on elections will prompt governments such as in India and Indonesia to tread very carefully, weaning their economies off subsidies only bit by bit.

"Once given, these kinds of subsidies are extraordinarily difficult to take away," Wilford said.

The issue of fuel subsidies has proved tricky for the Indonesian government ahead of next year's parliamentary and presidential elections, highlighted by the protests in the run-up to the policy move.

President Susilo Bambang Yudhoyono sought on Monday to ease people's concerns.

"The alternative would be a possible financial and economic crash similar to that of 1997, and the real loser here would be our own people," Yudhoyono told an investment forum.

While a threat by some legislators to impeach Yudhoyono on account of the decision was just "empty talk", it was dividing his ruling coalition, said Arbi Sanit, a political analyst at the University of Indonesia.

"If SBY failed to restore the unity of the coalition, it would jeopardize his chances for re-election," Sanit said.

Still, some analysts said that the fuel price increase was unlikely to trigger social unrest in Indonesia, even though it comes on top of rapid increases in food prices and other goods.

"Even though the people reject the fuel price increase, I don't see signs people want to make things worse," said political analyst Fachry Ali, noting that the latest increase was moderate in comparison to a rise of more than 100 percent in October 2005.  

"Nothing happened then, so it will be all right now."

MOUNTING COSTS

To be sure, raising fuel prices will come at a cost.

Though Taiwanese citizens would generally accept the fuel price rises, they would probably put the administration of freshly-inaugurated President Ma Ying-jeou under more pressure to deliver on his election promises of better economic links with China, said Wu.

The pick-up in inflation that results from lowering subsidies will also probably force central banks to increase interest rates, analysts say, just at a time when weakening global demand already threatens to sap growth.

But inaction could have an even greater cost, as it would contribute to the growing current account and fiscal deficits in countries such as India, putting further downward pressure on their currencies.

The cost of sinking so much money into fuel subsidies could drag significantly on countries like India, where significant investments are needed to improve education and infrastructure, said Wilford.

"Those kind of issues are just not getting the money they should be getting, because it's all going to prop up the price of fuel," he said.

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