Beware the spillover effects of the US–Israel–Iran conflict, SMF warns: 2026 won't be a rosy year

The war in the Middle East has triggered concerns in the domestic real sector. The tensions involving the United States, Israel and Iran are seen as worsening pressure on the global economy, including Indonesia. Martin D. Siyaranamual, head of the SMF’s Economic Research Division, explained that the current heated global situation makes the 2026 outlook for the real sector not as rosy as expected, including for the housing sector and its downstream industries. He noted that even without escalating conflict, the global economy slowdown trend had already appeared at the end of 2025. This suggests developing countries are relatively better off than developed ones, yet pressure remains. He said that although Indonesia still maintains growth around five percent, this is not enough to lift Indonesia out of the shadow of middle-income countries. The Middle East conflict is seen to have a direct impact on global energy prices, given the region’s status as a global energy production hub, including gas and crude oil. He noted that Iran is one of the major exporters of natural gas, a closest substitute to oil and coal. In light of this, he forecasts that world oil prices will rise. Presently, oil prices are reported to have reached around $90–$92 per barrel, with a possibility of breaking through the $100–$120 per barrel level. A surge in oil prices will constrain the government’s fiscal space. The burden of energy subsidies could rise significantly amid the need to finance other priority programmes. ‘The implications are clear: subsidy burdens rise. In other words, fiscal capacity will be increasingly constrained. It remains to be seen whether there will be greater priority for the housing sector or not,’ he said. He warned that in the real sector, particularly manufacturing and property, the pressure could have a cascading effect. When subsidies swell or energy prices are liberalised to market levels, purchasing power and production costs are both depressed. He believes the government faces a difficult choice between widening the deficit or letting inflation rise due to energy price adjustments. Consequently, the housing sector will inevitably be among the most affected due to its sensitivity to income and interest rates.