Indonesian Car Purchases Booming; Oil Production Declining

20 August 2005

With oil production declining, OPEC member Indonesia has become a net importer.

Reuters. Car sales in Indonesia rose 28.3% in July compared with the same period in 2004, data from the largest automotive distributor showed on Saturday.

PT Astra International Tbk said a total of 49,388 cars were sold by all distributors in the country last month, bringing the year to date national sales to 345,167 units.

For the first half of the year, sales of cars and trucks rose 31% from the previous year. The Indonesian Automotive Association (Gaikindo) has forecast total domestic vehicle sales this year at 550,000 units, from a record 483,000 in 2004 and 354,333 in 2003.

This rise came in spite of a 29% hike in fuel prices in March. The government controls (and subsidizes) fuel prices in the country.

“The government raised fuel prices, so what? People will grumble but they will still drive cars. They might drive less, but that does not mean they have decided not to buy a car,” said Chandra Pasaribu, an analyst at G.K. Goh. (Reuters)

The sharp annual rise was expected by analysts because of the improving economy and with interest rates around historically low levels. The Indonesian government forecasts economic growth at 6% this year from 5.1% in 2004, followed by 6.0%–6.5% next year.

Despite the central bank’s benchmark interest rates reaching a two-year high earlier this month, the interest rate on central bank certificates (SBIs) is still a relatively low 8.75%—and the rise has not been accompanied by a comparable rise in the interest rates for automotive loans.

Indonesia’s oil production, however, having peaked, continues to decline, as shown in the chart above. Indonesia thus has become a net importer of oil (likely leading to the eventual end of its membership in OPEC, the Organization of Petroleum Exporting Countries).

Rising oil prices combined with the need to purchase oil on the market for domestic use will add further to the economic burden.

“The fuel price hike policy will indeed increase the burden of the people, and may even cause an increase of poverty,” [Indonesian President] Yudhoyono said. But, saying he pursued the policy with “a heavy heart,” he predicted that if oil prices remain where they are, Indonesia would have to spend more than 140 trillion rupiahs [US$14 billion] on subsidies this year. Indonesia spent 73 trillion rupiahs (US$7.4 billion)on fuel subsidies last year.

“The burden for fuel subsidy that we must bear will swell along with the price hike of international crude oil,” he said. (NYT)