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Indonesia Might End Its Fuel Subsidies: What Does This Mean For Singapore-Listed Indonesian Companies?

Recently, there have been heavy discussions in Indonesia on whether the country should do away with its fuel subsidy program.

The government is expected to spend some US$25 billion to keep fuel prices low in Indonesia next year and that amounts to almost 14% of the country’s total budget. Newly-elected President Joko Widodo, who would take over the office on 20 October, has already announced that he plans to raise the price of fuel to redirect the savings to programs which target the nation’s poorest communities. So, if the price of fuel in Indonesia is to increase, what does it mean for the different types of Singapore-listed Indonesian businesses?

Consumer products

Petra Foods Limited (SGX: P34) operates mainly in Indonesia and it’s in the business of manufacturing and distributing consumer products such as chocolate and sugar confectionary.

If fuel subsidies do become history, Petra Foods might face challenges on two fronts: First, its cost of operations would most likely increase as transport costs and staff costs gets pushed higher due to inflationary pressures. Second, the company might see a possible tightening of its customers’ wallets due to them having lower disposable incomes once the fuel subsidies are cut.

To combat the first challenge, Petra Foods has to be able to pass cost increases on to its consumers, otherwise the company might be seeing compressed margins in the future. But, it’d be tough for the company to do so, especially if its consumers having lesser money to spend.

Real estate investment trusts

Lippo Malls Indonesia Retail Trust (SGX: D5IU) is the only real estate investment trust in Singapore which focusses on retail properties in Indonesia.

If the disposable income of the nation drops, the tenants in the REIT’s malls might see their businesses slow down. In Lippo Malls’ latest earnings release, it highlighted higher disposable incomes in Indonesian residents as a key driver of its future growth. If the fuel subsidies get cut and disposable incomes of Indonesians suffer, that’s one less tailwind for the REIT.

Healthcare

First Real Estate Investment Trust (SGX: AW9U) is a healthcare REIT with the majority of its assets in Indonesia. Incidentally, it is related to Lippo Malls as both are sponsored by PT. Lippo Karawaci.

Of the three examples, First REIT seems to be the least likely to be impacted by the possible fuel price increase as healthcare is generally a defensive sector and the services it provides is really more of a necessity.

Foolish Summary

It seems inevitable that Indonesia would have to move towards an economy with fewer subsidies as the country progresses. As long as the country’s growth can absorb the negatives caused by the cutting of fuel subsidies, there is no reason for businesses as a whole in Indonesia to slow down drastically. That being said, it is still a risk for investors if you are looking at individual companies operating in Indonesia.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.