Indef: Iran-Israel-US Escalation Triggers Rupiah Weakening, Risks Hampering Economic Growth
An economist from the Institute for Development of Economics and Finance (Indef), Rizal Taufikurahman, believes the probability of rupiah weakening in early trading is quite high as conflict between Iran, Israel, and the United States intensifies.
According to him, the rupiah’s current position is already at a vulnerable level, at around Rp16,800 per US dollar. Rizal believes that when conflicts escalate, global markets enter a risk-off phase, where investors tend to exit emerging markets and redirect funds towards the US dollar and US Treasury securities.
“Geopolitical shocks function as a trigger, not the primary cause,” he said when contacted on Sunday (1 March).
On the other hand, expectations of rising oil prices further increase the need for foreign exchange domestically because Indonesia still holds the status of net energy importer. This means the rupiah faces two pressures simultaneously: capital outflow and increased dollar demand for fuel imports.
“Weakening at the start of trading is more of a mechanical market response to global risks rather than a change in domestic fundamentals,” said Rizal.
He explained that the duration of weakening depends heavily on conflict dynamics. If escalation is limited and merely a sentiment shock, currency pressure tends to be short-lived, lasting from days to several weeks. However, if the conflict disrupts Middle Eastern oil distribution routes, the impact becomes a fundamental shock.
In that scenario, energy prices rise, oil and gas imports increase, inflation is pushed upward, and the current account deficit widens. “The rupiah weakens not only because of market psychology, but because the structure of domestic dollar demand increases,” he said.
Rizal identifies at least three main channels through which the impact would affect the Indonesian economy: energy, exchange rate, and fiscal policy. Rising oil prices increase import costs and pressure the oil and gas trade balance. The government might hold back increases in domestic energy prices to maintain inflation control, but the consequence is that the burden of energy subsidies and compensation could expand, thereby narrowing fiscal space in the state budget.
Rupiah weakening also triggers imported inflation because many industrial raw materials still depend on imports. Manufacturing production costs rise, which ultimately reduces purchasing power.
“The ultimate impact is that economic growth slows through a combination where purchasing power is pressed by inflation, investment is held back by uncertainty, and businesses tend to adopt a wait-and-see approach,” he said.
He emphasised that the Iran-Israel-US escalation is not merely a geopolitical event for Indonesia, but a macro shock that simultaneously pressures inflation, exchange rate, the state budget, and national trade activity.