Five Risks to the Economy from the Israel-Iran Conflict

The escalation of the conflict after the United States and Israel attacked Iran has raised the risk of retaliation that could affect the global economy and Indonesia. The war has led to a surge in global oil prices. Susiwijono Moegiarso, Secretary of the Coordinating Ministry for Economic Affairs, said Indonesia would not experience direct impact, as crude oil and fuel supplies come from many regions, not only the Middle East. However, Indonesia could be affected if global supply chains are disrupted. He noted that Indonesia’s trade with the Middle East is not very high; even when combined, Indonesia remains in surplus, he said at a discussion forum organised by UOB Indonesia in South Jakarta on Monday, 2 March 2026. Nevertheless, Susiwijono stated that Indonesia could be affected if there is disruption to global supply chains. Based on his presentation, there are at least five domestic risks if the war worsens: 1) Higher energy import costs. If supply chains continue to be disrupted, oil prices rise. In the macro assumption for the 2026 State Budget (APBN), the projected oil price is US$70 per barrel. Currently, oil prices have risen above US$80 per barrel. Each US$1 increase in ICP (Indonesia’s crude price) would require an additional Rp10.3 trillion in spending due to energy subsidies. A US$1 per barrel rise could also increase APBN revenue by Rp3.6 trillion. However, the state coffers would still run a deficit of Rp6.7 trillion. 2) Inflationary pressures. Not only oil prices but all global components would be affected, leading to higher prices. In the end, this would raise inflation, because price hikes affect not only energy but also raw materials for domestic industry largely imported. 3) Monetary tightening. If inflation occurs, the central bank would tighten interest rates, leading to economic slowdown. Higher rates could raise borrowing costs, causing companies to delay expansion plans, and households to struggle to access credit. 4) Investors shifting to safe-haven assets. In a geopolitically uncertain environment, investors would seek safe-haven assets to avoid risk, which could pressure stock markets or the Jakarta Composite Index (IHSG). 5) Rupiah depreciation. Pressure on the IHSG from capital outflows could cause the rupiah to weaken. When foreign investors pull their short-term funds, demand for the US dollar would rise and the rupiah would fall to a lower level.