Impact of Iran Conflict on Indonesian Economy: Government Concerned About Inflation and Fiscal Pressure
The brutal and deadly attacks from Israel and the United States on Iran on Saturday, 28 February, shocked the world.
Geopolitical tensions in the Middle East, particularly involving Iran, could potentially trigger global economic impacts. However, the government believes Indonesia’s economic fundamentals remain sufficiently strong to withstand such turmoil, although various risks including inflation, currency pressure, and fiscal burden warrant careful monitoring.
Susiwijono Moegiarso, Secretary of the Coordinating Ministry for Economic Affairs, emphasised that direct impacts on the national economy remain limited unless major disruptions occur in global energy distribution channels.
Amid potential global crisis, Indonesia is assessed to possess relatively good economic resilience compared to other nations.
“In the face of these risks, our resilience remains high. Our growth is among the highest of G20 countries. We rank second after India,” Susiwijono stated at the UOB Media Editors Circle held in Jakarta on Monday, 2 March.
According to the government, Indonesia’s dependence on the Middle Eastern region is not particularly large, either in terms of oil imports or trade. “From a broader economic perspective, there is not much impact. Oil has many sources, not only from the Middle East. Our trade balance with the Middle East is also not particularly high,” he explained.
However, Susiwijono noted that the situation could change drastically if global energy distribution channels are disrupted. The greatest threat emerges if there is a total closure of the world’s strategic shipping routes. “The disruption would occur if the Strait of Hormuz is completely closed. This is what is important to anticipate,” Susiwijono stated.
The Strait of Hormuz is a vital route for global oil distribution. Closure of this route could potentially drive a significant spike in global energy prices.
Rising oil prices have direct impacts on the State Budget and Expenditure (APBN), particularly because of energy subsidies. “Our APBN’s sensitivity to energy is high. Every US$1 rise in oil prices means the government must increase subsidies by approximately Rp10.3 trillion, while non-tax state revenue is only about Rp3 trillion. So there is a deficit of around Rp6 trillion,” he explained.
The government, he noted, continues to monitor developments in global energy prices to anticipate fiscal pressures.
Geopolitical disruptions can also trigger restrictions on global commodity movements, resulting in higher prices for goods. “If global supply chains are disrupted then everything will be affected. There will be inflationary pressure and prices will rise,” Susiwijono said.
In such circumstances, the central bank could potentially raise interest rates to control inflation, which could ultimately slow economic growth.
Global uncertainty typically drives investors to seek safe assets such as gold, causing foreign funds to leave developing countries. “Investors will choose other assets such as gold. Capital outflows could occur, putting pressure on the rupiah, and this will also affect our APBN,” he stated.
Weakening of the rupiah exchange rate could increase import costs and increase government debt burdens.
Despite various risks looming, the government emphasised that current conditions remain manageable. Policy responses will be adjusted based on developments in geopolitical and global economic conditions.