By Matthew Bigg
JAKARTA (Reuters) - Indonesia's Golkar Party has emerged from a policy fight over whether to raise subsidized fuel prices less tainted than its main coalition partner, the Democrat Party, and voters are likely to take note ahead of elections in 2014.
A parliamentary vote on Friday to delay raising fuel prices by 33 percent and instead grant the government authority under certain conditions to raise prices later saddles President Susilo Bambang Yudhoyono's Democrat Party with an unpopular decision down the line.
It could keep inflation in check in the short term, but will increase the burden on government coffers and undermine efforts to rein in a budget deficit, pressuring bond prices, according to economists.
For voters, though, it all starts with the politics.
As police fired water cannon and tear gas grenades to keep protesters at bay outside parliament, Golkar told the public it had switched to opposing a fuel price rise. Then, inside parliament, it voted for one on precisely the terms it wanted.
"Golkar and the Prosperous Justice Party are trying to secure their electoral fortunes and don't want to get mud splashed on them from this very unpopular policy. That is why they leave it to the government to decide on this hike," said Dodi Ambardi, executive director of Indonesia's Survey Institute.
"In terms of political moves, Golkar seemed the most cunning to come out of this mess with the message that they are on people's side," he said. "It's amazing how the elections are still two years away but the battle has begun."
Golkar, the political machine of former autocratic leader Suharto, has the second largest number of seats in parliament and support from businessmen, civil servants and rural farmers, making it a contender to win a wide-open election.
Yudhoyono must step down in 2014 after two terms and Golkar's leader, the tycoon Aburizal Bakrie, would have a strong chance to replace him if he decides to run.
Yudhoyono won credit in December and January when Fitch and Moody's ratings agencies upgraded Southeast Asia's largest economy to investment status, though his popularity has been hit by allegations of corruption within his party and he may have misjudged the likely reaction to a fuel price hike.
In a national address on Saturday, he said a fuel price rise was necessary to promote a healthy fiscal and state budget and save the economy, but he acknowledged other factors.
"Even I feel that everything is related to political interests, including the politics ahead of the election in 2014," he said.
The agencies cited a stable policy framework, a big domestic market in the world's fourth largest country by population and sustained growth above 6 percent that made Indonesia one of the hottest emerging markets in the world for investors.
Even so, the question of what to do about fuel prices that are currently the lowest in Asia lurked in the background.
The government repeatedly postponed making a decision on an issue that touched bond prices, inflation, infrastructure spending and investor confidence.
In the short term, a decision not to raise prices on the April 1 deadline will put pressure on the bond market because a higher fiscal deficit will mean higher bond issuance that will in turn lead to investor outflows, said Gundy Cahyadi, an economist at OCBC in Singapore.
"The BI (Bank Indonesia) rate is likely to stay on hold for now, but it's not going to make investors attracted to the bond market because who knows when the fuel price hike will kick in," Cahyadi said. Other economists echoed that view.
Bank of America Merrill Lynch said in a report that parliament's decision could undermine efforts to keep the budget deficit at a tolerable level. It could add 50 trillion rupiah in fuel subsidies if the government does not keep consumption within its quota, the report said.
"The fuel subsidy could balloon to about 205 trillion rupiah in 2012 (versus 165.2 trillion rupiah in 2011) on higher consumption and oil prices," it said.
"This could put the budget deficit closer to 3.2 percent of GDP, higher than the revised estimates of 2.2 percent of GDP had the fuel subsidy cut materialized," it said.
One crucial audience for the fuel subsidy debate is S&P, whose sovereign ratings team visited Indonesia last week. On Monday, S&P said it retained a "positive outlook" in the wake of the fuel decision.
It said it may raise the country's sovereign rating if inflation pressures diminish and external debt declines, but it added a caveat.
"A stalling of reforms or the absence of timely and adequate policy responses to renewed fiscal or external pressures would result in the rating stabilizing or weakening," said associate director of sovereign and international public finance ratings Agost Benard.
Parliament's decision postpones any fuel price hike, but opinions differ as to when one could be implemented.
Under the legislation voted on Saturday, the government has authority to raise prices only if global prices are 15 percent higher than the government's $105 a barrel forecast for the Indonesian Crude Price, a basket of crudes, over six months.
That reduces the prospect of a rise this year only if the six-month limit is not applied retrospectively.
If the ICP is $123 in April and May, it will be sufficient to trigger a fuel price rise, Energy Minister Jero Wacik told reporters on Monday.
For many ordinary people, the protracted debate has been lose-lose. The prospect of a petrol pump price rise is unpalatable and the cost of living has already started to rise in anticipation of higher fuel costs.
"When rumors of a fuel price hike started to spread, food prices immediately increased," said Putra Syahputra 30, a public relations consultant.
"When the fuel price hike was delayed, did we see other prices go down? No."
(Reporting by Olivia Rondonuwu, Adriana Nina Kusuma and Reza Thaher in JAKARTA and Emily Kaiser in SINGAPORE; Editing by Nick Macfie)