OREANDA-NEWS. Government support for the Indonesian fertiliser industry remains strong, despite a reduction in the overall state budget, Fitch Ratings says. This is because strengthening of the nation's food security and improvement of domestic infrastructure are the government's priorities.

The Indonesian government in its draft for the 2017 state budget increased the budget for fertiliser subsidies by 3.6% to IDR31.2trn, which the state expects to be enough for 9.55 million tonnes of fertiliser. The allocation made up about 18% of the total subsidy budget, and was the largest subsidy for non-energy sectors and the third-largest among all sectors after electricity and liquefied petroleum gas.

In comparison, recently appointed Finance Minister Sri Mulyani set the state's expenditure at IDR2,070trn in the draft budget for 2017, down IDR12.5trn from the latest revised 2016 budget. The total subsidy budget was cut to IDR174.9trn from IDR177.8trn, while non-energy subsidies were reduced to IDR82.7trn from IDR83.4trn.

The fertiliser industry was also recently selected as one of the few industries allowed to purchase gas for as low as USD6 per million British Thermal unit (MMBTU), with maximum deduction of USD2/MMBTU from the original gas purchase price. This incentive is important in protecting the fertiliser industry amid gas price volatility as gas costs account for 60%-70% of fertiliser production costs. This regulation applies retroactively from 1 January 2016. The fertiliser industry has also been chosen as the third industry to have priority in gas supply allocation.

The continued robust subsidy allocation and gas incentives will benefit state-owned fertiliser company PT Pupuk Indonesia (PTPI; AAA(idn)/Stable). PTPI's rating is equalised with that of the sovereign given their strong operational and strategic linkages, including that the state's fertiliser subsidy is distributed through PTPI.

The government has considered tinkering with this mechanism to distribute the subsidy directly to the farmers, which presents a risk for PTPI. However, the government said in the draft budget for 2017 released on 18 August 2016 the changes need further study and will be done in stages, if implemented. Fitch believes that until there are further improvements in the distribution structure, the majority of the fertiliser subsidy will be allocated through PTPI in the medium term.