Geopolitical Impact and Fiscal Discipline Test

Headline

Government commits to not raising the price of subsidised fuel during 2026.

Government commits to not raising the price of subsidised fuel during 2026.

Amid spending expansions to fund government programmes, Indonesia is entering an increasingly complex economic phase. Pressures on the 2026 State Budget (APBN) no longer stem solely from domestic financing needs but also from intensifying global geopolitical impacts.

The escalation of the US-Israel conflict against Iran has driven a surge in global oil prices while heightening financial market uncertainty. Oil prices moving towards the US$100 per barrel range, coupled with rupiah depreciation breaching Rp17,000 per US dollar, represent a significant combination of pressures on the APBN.

Here, the APBN is tested in its classic functions as both a growth stimulus and a shock absorber. On the state spending side, rising oil prices directly increase the burden of energy subsidies and compensations. In the 2026 APBN, energy subsidy allocations are estimated at around Rp200 trillion. The total energy burden could approach or even exceed Rp300 trillion if pressures persist.

Fiscal sensitivity to oil prices is highly significant. Various estimates indicate that every US$1 increase per barrel above the assumed Indonesia Crude Price (ICP) could add around Rp4-6 trillion in pressure to the APBN, depending on energy subsidy schemes, exchange rates, and domestic consumption volumes. Thus, if oil prices surge from US$80 to US$100 per barrel, there is potential for an additional fiscal pressure of Rp80-120 trillion solely from the energy channel.

In a state spending budget exceeding Rp3,842 trillion, this pressure is not easily absorbed. Moreover, Indonesia’s APBN has a high degree of rigidity. Employee spending, social assistance, and subsidies are components that are difficult to adjust in the short term. Consequently, surges in energy subsidies risk displacing productive spending such as on infrastructure, education, and health.

From the exchange rate and financing perspective, rupiah depreciation brings equally serious consequences. The 2026 APBN is prepared with an exchange rate assumption of Rp16,500. Various studies estimate that every Rp100 weakening per US dollar could add Rp5-7 trillion in pressure to the APBN deficit, through increased energy subsidy spending, debt costs, and import-based expenditures; thus, a Rp500 weakening causes an additional APBN burden of Rp25-35 trillion.

Additionally, rupiah depreciation also drives up yields on Government Securities (SBN). In situations of uncertainty, investors demand higher returns as compensation for elevated risks. This means government debt costs rise, further squeezing fiscal space. The deficit, initially estimated at Rp600-700 trillion or 2.68% of GDP, is at risk of ballooning beyond the psychological threshold of 3%. In volatile financial markets, maintaining investor confidence is crucial. When fiscal credibility wavers, financing costs can rise significantly due to higher interest rates.

POLICY DILEMMA

In this context of pressures, debates will undoubtedly touch on government programmes. Debates also concern the timing of implementation, carried out when fiscal space is narrowing due to external pressures.

This is where the policy dilemma emerges. The government faces two demands: maintaining public purchasing power through state spending while preserving fiscal credibility in the eyes of the market. If programmes are implemented without careful calculation, the risks are not only a widening deficit but also pressures on the exchange rate, rising inflation, and increased debt costs.

On the other hand, fiscal discipline should not be interpreted as indiscriminate austerity. Haphazard efficiency measures risk deepening economic slowdown. To date, government spending has been one of the main engines of growth. When spending is constrained without priorities, consumption weakens, investment stalls, and job creation slows.

Furthermore, budget cuts in strategic sectors like education, health, and research could disrupt the foundations of long-term growth. In the knowledge-based economy era, reducing investments in human capital will only heighten the risk of the middle-income trap.

Therefore, what is needed is smart fiscal discipline. Discipline that can distinguish between productive and non-productive spending, between strategic efficiency and mere budget cuts. In the current geopolitical pressure situation, every rupiah in the APBN must work more effectively.

MIRROR FROM OTHER COUNTRIES

Important lessons can be drawn from the experiences of Brazil and Venezuela, which have faced similar crossroads. In 2002, when Luiz Inacio Lula da Silva was elected President of Brazil, markets responded with panic. The exchange rate weakened, inflation rose, and investor confidence declined.

Populist programmes like Fome Zero (Zero Hunger) that he championed were initially perceived as worsening fiscal conditions. However, instead of rigidly adhering to a populist agenda, Lula executed a policy switch: correcting policy designs, maintaining fiscal discipline, and adopting a more moderate economic approach to restore market confidence.

The result was that social programmes continued, but within a credible fiscal framework. Even the poverty alleviation programme like Bolsa Familia only consumed about 0.5% of GDP but succeeded in lifting millions out of poverty and significantly reducing inequality. Lula demonstrated one important thing: populism does not have to be abandoned but must be disciplined.

In contrast, Hugo Chavez’s experience in Venezuela showed a different path. Chavez maintained expansive social spending based on oil revenues without adequate fiscal adjustments. Large subsidies, price controls, and state expansion in the economy