Indef: Israel-US-Iran conflict could widen Indonesia's budget deficit

Jakarta - The Institute for Development of Economics and Finance (Indef) has warned that the conflict involving the United States, Israel, and Iran in the Middle East risks widening Indonesia’s state budget deficit.

M. Rizal Taufikurahman, head of Indef’s Centre for Macroeconomics and Finance, stated that the economic impact of this conflict will reach Indonesia through three main channels: energy, finance, and logistics.

Rizal highlighted the risk that supply disruptions in the Gulf region, particularly along the vital Strait of Hormuz shipping route, could increase global oil and liquefied natural gas (LNG) risk premiums, directly impacting Indonesia’s energy import costs.

“For Indonesia, which remains a net importer of oil and LPG, this rise in global prices will quickly drive inflation through increased transportation, electricity, and food logistics costs,” Rizal said.

From a fiscal perspective, Rizal explained that the government faces a dilemma between maintaining energy prices—with the consequence of ballooning subsidies—or adjusting domestic prices, which risks reducing public purchasing power.

According to him, the combination of increased government spending, weakened revenue, and higher financing costs has the potential to widen the budget deficit.

“Therefore, the necessary response is to maintain exchange rate stability, reallocate non-priority spending, and strengthen more targeted social protection rather than sustaining broad-based energy subsidies,” Rizal said.