Incoming Indonesian President Susilo Bambang Yudhoyono will have to try to reduce ballooning fuel subsidies to improve his country's fiscal health soon after his Oct. 20 inauguration. Jakarta initially allocated more than $2 billion for the 2004 fuel subsidy, but soaring oil prices forced the government to increase the allocation to $6.9 billion — a sizeable chunk of the total $41 billion state budget — in the revised 2004 budget. The current government has proposed $3.6 billion for the 2005 fuel subsidy at an assumed oil price of $24 per barrel. However, to keep oil prices stable in Indonesia, the subsidy would have to be much higher, as oil prices will most likely continue hovering above $40 per barrel throughout 2005. STRATFOR has forecast that East Asian countries would begin to experience political turmoil by the end of the year as a combination of rising interest rates, high oil prices and possible severe economic disruption in China would erode the region's recent prosperity. The Philippines has already begun showing signs of this trend, and Indonesia will, too. Fuel subsidies are a sensitive issue in Indonesia, and previous reductions have sparked massive protests. After the Yudhoyono government is formed, the subsidy issue will probably prove to be its first major test and will demonstrate the strength of both the new regime and its opposition. Substantial fuel subsidies were implemented in Indonesia under Suharto to keep energy cheap, facilitating economic development and improving living conditions. However, that was when the country was a robust oil producer. Indonesia, although still a member of the Organization of Petroleum Exporting Countries, became a net importer for the first time in March. The combination of rising imports and rising prices is making subsidies untenable. The current government and incoming president realize this. Minister of Energy and Mineral Resources Purnomo Yusgiantoro said Sept. 21 the government plans to cut spending on fuel subsidies effective next year, except for diesel oil and kerosene. During his presidential campaign, Yudhoyono said if he was elected he would have no choice but to cut subsidies. However, there is a difference between recognizing a problem and solving it. In the past, cutting fuel subsidies led to widespread protests and riots across Indonesia. The issue proved to be the straw that broke the camel's back for Suharto in 1998; his regime's bowing to pressure from the International Monetary Fund to lift fuel subsidies led to violent street protests and his fall from power. Outgoing President Megawati Sukarnoputri tried to introduce large subsidy cuts in 2003, but after numerous relatively small protests, she backed off and the reductions were severely curtailed or junked. As a newly elected president, Yudhoyono will have a certain grace period during which he will find it easier to introduce historically unpopular reforms. However, the president cannot expect to be too insulated. First, when previous leaders cut subsidies, the move immediately caused a groundswell of grassroots opposition. Even a recent landslide election victory will not prevent a certain number of demonstrations — especially when the government eventually attempts to cut subsides to diesel and kerosene, the most widely used and heavily subsidized fuel products. Second, Yudhoyono is not coming into office with a strong control of the government. Golkar chairman Akbar Tandjung has pledged to lead an opposition alliance against the government with the Indonesia Democratic Party-Struggle, the United Development Party and the Prosperous Peace Party. The opposition alliance, on paper, currently holds 307 of the 550 seats in the House; while many representatives can be expected to defect once Yudhoyono forms a Cabinet, the opposition will likely keep a substantial presence — if not a majority — in the House. Popular unrest over fuel subsidy cuts offers Yudhoyono's opponents a perfect opportunity to undermine his government, if not bring it down. The incoming president's first 100 days in office could prove to be highly contentious and volatile. Yudhoyono's ability to navigate through the subsidies minefield will prove his government's strength — if it survives.