High Oil Prices, Rupiah Under Pressure, Short-Dated Bonds Become Attractive

The surge in world oil prices driven by the Israel-US-Iran conflict is starting to place layered pressure on the domestic economy, from a weakening rupiah, to the potential widening of energy subsidies, and shrinking room for rate cuts. In this environment, short-dated bonds are considered attractive as they offer competitive yields with lower duration risk.

Global financial markets remain volatile amid geopolitical uncertainties in the Middle East, particularly regarding global oil supply and the Strait of Hormuz, which remains closed.

Syuhada Arief, Senior Portfolio Manager Fixed Income at PT Manulife Aset Manajemen Indonesia (MAMI), said that market sentiment at present remains heavily influenced by the latest developments in the Middle East conflict.

According to him, the persistence of elevated energy prices also makes the trajectory of policy from the United States Federal Reserve more complex.

Although rate hikes are not the main scenario, high oil prices make the Fed more cautious in setting the policy rate path.

Market expectations have shifted. Whereas at the start of the year markets priced in a 50 basis point cut in the Fed Funds Rate, now markets see U.S. rates staying steady for the year.

Syuhada assesses that the government faces a tough trade-off between maintaining household purchasing power and preserving fiscal and exchange-rate stability of the rupiah.

‘Growth-friendly policies, such as maintaining subsidised fuel prices and increasing energy subsidies, are regarded as positive for supporting households’ purchasing power, though they will raise the state budget deficit and press the rupiah,’ he said.

On the other hand, energy price adjustments can help safeguard the credibility of the national budget and support the rupiah, but risk dampening household consumption.

Fiscal risk is also rising along with higher world oil prices. As of March 2026, the deficit amounted to 0.93 percent of GDP, wider than the same period last year at 0.43 percent.

MAMI notes that every US$1 per barrel increase in oil price can widen the budget deficit by around Rp 6.8 trillion. Assuming the average oil price sits at US$90 per barrel, the fiscal deficit is expected to increase by about 0.5 percent of GDP.

However, the government’s budget efficiency measures are still seen as providing room to keep the budget deficit below 3 percent of GDP.