Indonesian streets are once again filled with the cacophony of student protest, this time against a sharp rise in fuel prices. The government's decision to cut subsidies has sent pump prices soaring by over 30%, a move that has ignited a familiar cycle of anger and economic anxiety. Jakarta is burning, or at least metaphorically so, as the rupiah wobbles and inflation expectations spike. But amid the chaos, an unlikely beacon of stability is being cited: UK energy policy.
Let that sink in. The United Kingdom, a nation that has spent the past two years grappling with its own cost-of-living crisis and a botched energy price guarantee, is now being touted as a model for developing economies. It seems absurd, but there is a kernel of financial logic here that deserves scrutiny.
Indonesia's predicament is a classic case of fiscal unsustainability. Fuel subsidies were devouring an ever larger share of the budget, crowding out investment in infrastructure and education. The International Monetary Fund had been prodding Jakarta to reform, but the political calculus is brutal: raising fuel prices hits the poor hardest and triggers precisely the riots we are seeing now. The government has tried to cushion the blow with cash transfers, but the optics are terrible.
Enter the UK. Our energy price cap, introduced by Ofgem, is far from perfect. It has been blamed for exacerbating supplier failures and distorting the market. Yet in emerging market circles, it is viewed as a mechanism that insulates consumers from the full volatility of global energy prices without blowing a hole in the national budget. Indonesia's subsidy system was a blunt instrument that benefited the wealthy as much as the poor. The UK model, for all its flaws, targets support more efficiently.
But before we pat ourselves on the back, consider the context. The UK is an advanced economy with deep capital markets, a credible central bank, and the ability to issue debt in our own currency. Indonesia faces capital flight risks, a history of currency crises, and a narrower fiscal space. Copying UK policy without the institutional scaffolding is a recipe for disaster. Indeed, the very instability that Indonesia is now experiencing could be exacerbated if investors smell a whiff of unsustainable debt.
The real lesson from the UK is about credibility. When the Bank of England hiked rates aggressively, it sent a signal that it would not tolerate inflation. That commitment helped stabilise gilt yields even as the energy price cap added to fiscal pressure. Indonesia's central bank has also raised rates, but its credibility is more fragile. Without that anchor, fuel price reforms become a game of chicken with the bond market.
Meanwhile, the students in Jakarta have a point. They are bearing the cost of past fiscal profligacy and a global energy shock that is not of their making. The UK's energy policy may be a model in terms of design, but its implementation requires a level of economic resilience that Indonesia does not yet possess. The irony is that as Indonesian protesters burn tyres, UK households are still nursing their own energy bill shock from last winter.
For markets, the key metric to watch is Indonesia's current account deficit and the rupiah. If the protests force a reversal of the subsidy cuts, the fiscal hole will widen, and the rupiah will take another hit. That would be the worst outcome for bondholders. The UK model only works if it is sustained through political turmoil. So far, the Indonesian government is holding the line, but the heat is rising.
In the City, we trade on perceptions. The perception that UK energy policy is a benchmark for stability is a new one, and it may be short-lived. But it underscores a broader point: in a world of volatility, even an imperfect system can look like a safe haven if it is backed by credible institutions. Indonesia has the raw materials, but it is still building that credibility. For now, the students are reminding everyone that the bottom line is about who pays the price.
