By Kanupriya Kapoor and Jonathan Thatcher
JAKARTA (Reuters) - Indonesia's parliament could pass measures on Monday paving the way for a 33 percent rise in the country's fuel prices to reduce a government subsidy bill that has cast a shadow over Southeast Asia's biggest economy.
If passed, the measures could also restore some confidence in the struggling rupiah after the central bank scrambled last week to prop up the currency as it was caught in an emerging market selloff. Jakarta shares and the rupiah were steady in early trading.
Raising fuel prices has been seen as a key test of President Susilo Bambang Yudhoyono's commitment to economic reform in the final 1-1/2 years of his term as prospects for continued rapid economic growth have started to soften.
Student and labor union groups have promised to protest across the country against the proposed increase. But by early morning, and after torrential rain, there was little sign of protesters gathering outside parliament.
About 20,000 security officials had been placed on alert in case of mass protests, media reports quoted police officials as saying. Protests have marked previous attempts to raise fuel prices.
Maintaining the subsidy has undermined the government's reputation in financial markets for fiscal discipline and also contributed to a deepening current account deficit. Still the rate rises, and a fuel price increase, would on the other hand raise the cost of living for Indonesians, a sensitive issue ahead of presidential and general elections next year.
On Saturday, about 70 percent of members of the parliamentary budget committee backed 2013 budget revisions. If these are passed by a full session of parliament on Monday, they will pave the way for the fuel price rise.
The measures include some 9 trillion rupiah ($910 million) in compensation for the poor to protect them from the initial impact of a planned average fuel price increase of 33 percent.
Yudhoyono has insisted parliament make that money available before he cuts fuel subsidies, which last year cost the former OPEC member some $20 billion. The finance ministry has said the price rises could save the state about $4 billion if they are implemented this month.
"I believe the fuel price increase will be next week," the Kompas daily website quoted National Planning Minister Armida Alisjahbana as saying on Saturday.
Rumors late last week that Jakarta was about to raise fuel prices helped lift the rupiah off its lowest level against the dollar in almost four years as the currency came under fire from investors cutting their emerging market exposure over uncertainty in the future of U.S. monetary policy.
The pressure on the rupiah and concerns of the inflationary impact of costlier fuel, prompted surprise increases in two of the central bank's key interest rates last week.
The finance ministry has warned that growing demand for subsidized fuel, unless prices rise, could exceed 3 percent of GDP. The initial budget had put the deficit at just 1.6 percent.
Pointing to concerns over stalling reform momentum, ratings agency Standard & Poor's early last month downgraded its outlook for Indonesia's sovereign credit to stable from positive.
The move was especially galling for the Indonesian government because at the same time S&P upgraded its rating for the neighboring Philippines.
While Indonesia's technocrats have been shouting for fuel prices to rise, the issue has become largely hostage to politics ahead of next year's elections.
Of the three parties to oppose the measure in Saturday's budget committee meeting, one was ruling coalition member PKS, the country's biggest Muslim party.
Analysts say the PKS is hoping to use the issue to divert attention from allegations that senior party members were involved in a beef import scam and sexual impropriety, charges which threaten to wreck its election hopes next year. ($1=9,882 rupiah)
(Editing by Neil Fullick)