The forex market is predicting an interest rate hike for Indonesia after new president Joko Widodo fulfilled a key election promise early by cutting government fuel subsidies to save an estimated $8bn per year.
The Indonesian rupiah is the best performing major currency in Asia Pacific so far on Tuesday, rising 0.6 per cent to 12,138 per dollar.
Indonesia's central bank is expected to hold an extraordinary meeting later on Tuesday, wrote OCBC analyst Wellian Wiranto, and could hike rates because higher fuel prices will contribute to inflation.
Mr Widodo, a carpenter's son loved by foreign investors who narrowly won the presidency by defeating Suharto era general Prabowo Subianto, on Monday eveninghiked the subsidised fuel price by 31 per cent.
The move will undoubtedly be unpopular with the scores of Indonesian motorists who rely on cheap fuel to get around in a country with a chronic lack of efficient public transport. But it shows Mr Widodo is serious about economic reform and wants to plough cash into solving Indonesia's problems more than he fears a short-term public backlash
The fuel hike savings "can now be used to build schools for the young and hospitals for the old" wrote Mr Wiranto, "rather than being burned in engines of cars idling in traffic jams".
He added in a research note:
The gutsy policy will allow [Mr Widodo] to unburden himself from the heavy shackles which had held back previous administrations, because of one simple rule: You need money to do stuff in life. Indeed, with the decision, the government will be saving as much as $8bn a year, which it can now tap into to pursue the infrastructure-heavy agenda that it has set into next year.
It will not escape market's attention too that this is a man who manages to do so within less than a month in office and, crucially, in an environment where global oil price is dropping. Previous administrations had largely chosen the more convenient path of discussing and deliberating until their backs are shoved against the wall of incessant global oil price uptick before they did the inevitable.
original source: http://www.ft.com/intl/fastft/237832/rupiah-firms-after-indonesia-hikes-fuel-price