Fuel Wars Wound Yudhoyono

Indonesian President Susilo Bambang Yudhoyono seems almost certain to fall short in his attempt to put in place a 33.3 percent fuel price hike, probably doing incalculable damage to what is left of his presidency and dismaying foreign investors and ratings agencies.

A week of demonstrations nationwide - the worst since Yudhoyono took office in 2004 - culiminated Friday when thousands of demonstrators thronged the streets of Jakarta as a planned vote on the price increase in the House of Representatives neared. The main route to Sukarno-Hatta International Airport was blocked by protesters, as were two lanes of the Jakarta inner city toll road. Violence erupted in central Jakarta late Thursday and Friday as protesters turned over cars and set them afire. A total of 54 people were arrested on Thursday as police struggled to keep order.

Angry labor unions, student groups, various protest movements and the well-oiled street politics of the opposition Indonesian Democratic Party of Struggle (PDI-P) managed to create an atmosphere of popular upheaval despite the fact that the economy is robust and the country is largely peaceful. Added to the stew were the opportunism of the Islamist Prosperous Justice Party (PKS), and Golkar, the second-biggest party in Yudhoyono’s fragile coalition, which backed away from an earlier agreement to support the price hike, leaving the president looking weak. In the end, only the president's Democratic Party was holding firm as the House adjourned Friday. It was uncertain if a vote would even be taken as the various parties argued about the acceptable "threshold" price for oil that would get them to trigger a price increase.

But what was really at stake was political and Yudhoyono seems to have taken a thrashing.

The debacle could herald the real beginning of the lame duck phase for a president who has grown progressively weaker during his second term despite his resounding election victory in 2009. With many of his key lieutenants facing corruption charges and his party in disarray, the president seems to have finally lost control of his shaky ruling coalition.

National elections are to be held in 2014 and the country's chattering classes are already absorbed in pondering the likely next president. In such a climate, nominal coalition allies likely see no practical value in helping the president, who cannot run for a third term, raise fuel prices regardless of the economic sense behind such a move.

The other problem facing the president after such an embarrassing defeat is what to do with his "partners," Golkar and the small but vocal PKS. Both parties occupy key cabinet posts and one way to discipline them for breaking ranks would be to jettison them from the cabinet. But the president has been reluctant to make decisive moves on his cabinet - or indeed much of anything – although he may be backed into a corner by such open dissension.

The flip side is that Golkar and PKS might even welcome being removed from a floundering government as an election nears. There can be little political advantage for Golkar, the country's largest party, or PKS, its most fractious Islamist party, in being tied to Yudhoyono's tattered coattails.

In any case, should the fuel price move fail, it is hard to imagine SBY mounting any major initiative before 2014. Instead, he will likely confine himself to trying to minimize the damage to him personally from a growing party-funding scandal that has already brought down the party treasurer and a key lawmaker. The mess is likely to also lead to charges being brought against Democratic Party chairman Anas Urbaningrum and two cabinet ministers, Sports Minister Andi Mallarangeng and Manpower boss Muhaimin Iskandar. It is Mallarangeng whom the president likely misses the most. A long-time protégé once seen as a possible future president, Mallarangeng has served previously as Yudhoyono's spokesman and a key political strategist.

"He needs Andi but Andi has been made irrelevant by the scandal," said a veteran local journalist. "SBY doesn't have anyone to turn to for strategy or political muscle anymore."

Likewise, SBY misses his first term vice president, Golkar's Jusuf Kalla, who was a master at cracking the whip and using his personal charm to keep unruly allies in line. The current vice president, Boediono, while considered to be honest and capable, is a nonpolitical technocrat with almost no political capital.

The end result has been drift and inaction since 2009 for a president who seems out of touch with politics. His troubles started with the assault on his first finance minister, Sri Mulyani Indrawati, by forces aligned with coal tycoon and Golkar chairman Aburizal Bakrie, who wanted her out because of her zeal in seeking back taxes from his empire and her refusal to allow government bailouts to his ailing companies in the wake of the 2007-8 global financial meltdown. When Sri Mulyani was ultimately driven out of Yudhoyono’s cabinet and into the eager arms of the World Bank, where she became a managing director, there were no negative repercussions for his supposed partners in Golkar or PKS, which also backed the unsightly assault on Sri Mulyani. It was clear there would be no discipline inside Yudhoyono's political world.

Often criticized for being naive and amateurish, Yudhoyono's Democratic Party also badly miscalculated when one of its lawmakers said publicly this week that Bakrie had supported a Rp2,000 increase in the fuel price. Bakrie's statement, made privately, was an embarrassment and he quickly denied it. The Democrat involved was disciplined but the damage to the fuel hike was done and the same day Golkar said it would not vote for the plan.

A deal brokered between the Democrats and Golkar to try to buy off protest through the distribution of direct cash assistance to the public after a fuel price hike appears to have collapsed. Golkar became wary of that maneuver because its leadership did not want to see the Democrats win public support with cash payments financed by the savings the government would realize from cutting the subsidy.

The problem is that the projected fuel price increase, which was expected to drive the cost of subsidized premium fuel, the most popular grade, from Rp4,500 (49 US cents) a liter to Rp6,000, is badly needed. The price of internationally traded crude has risen over the past six months from a low of about US$75 per barrel to hover near US$110 as unrest in the Middle East and the threat of military action against Iran have driven prices steadily upward. It was a miscalculation fostered by Yudhoyono himself when he cut prices shortly before being reelected in 2009.

Most economists agree that the price hike is necessary because of the distortions that subsidies build into the system, especially as prices skyrocket internationally, increasing the amount the government must put into the subsidy. Even at a 33.3 percent increase, the government will still be forced to subsidize a commodity that in reality costs around Rp8,000 for premium fuel. Without a price hike, the government’s budget deficit is expected to rise to 4 percent of GDP, more than double its 2012 target of 1.5 percent.

The government paid US$18 billion in various subsidies in 2011 for fuel, exceeding the cost of Indonesia’s entire social and education system budgets.