Indonesia needs to prepare strategy to protect economy amid global pressures: Indef

Jakarta — The Institute for Development of Economics and Finance (Indef) assessed that the Indonesian government needs to prepare strategic measures to maintain national economic stability amid increasing global pressures.

Indef Executive Director Esther Sri Astuti explained in Jakarta on Saturday that weakening rupiah against the US dollar could push the state budget deficit beyond the 3 per cent threshold relative to Gross Domestic Product (GDP).

This is because the budget assumption for the exchange rate stands at approximately Rp16,500 per US dollar, whilst the rupiah is currently approaching Rp17,000 per US dollar.

According to Esther, this situation could increase the government’s budget burden because various expenditure components denominated in US dollars will expand accordingly, limiting the government’s fiscal space for development programmes.

“Oil prices have now exceeded 100 US dollars per barrel, far removed from the budget’s assumption of 70 US dollars per barrel,” she said.

Nevertheless, Esther believed the government could still mitigate the situation through several strategies to protect national economic resilience amid global uncertainty.

First, the government should direct state spending towards productive activities, such as programmes capable of driving economic growth and increasing state revenue. Conversely, consumptive spending should be reduced or discontinued to improve budget efficiency.

Second, the government should expand opportunities from sectors with potential to generate foreign exchange. This step is crucial given the rising need for US dollars, particularly for servicing foreign debt payments and various international transactions.

Third, the government must strengthen hedging strategies against rupiah exchange rate fluctuations in every payment using US dollars. Through such mechanisms, the impact of rupiah weakening on foreign currency payment obligations can be mitigated.

Additionally, Esther emphasised the importance of strengthening national energy security. This includes building and increasing domestic oil refineries so that Indonesia’s crude oil can be processed and utilised optimally.

Meanwhile, the government also needs to accelerate the development of renewable and alternative energy to reduce dependence on fossil fuels. Indonesia is considered to have significant potential in alternative energy sources such as hydropower, solar, and wind power.

“Encourage renewable energy investment so Indonesia is not entirely dependent on fossil energy, since Indonesia has many alternative renewable energy sources such as water, solar, wind and others. Provide more incentives,” she said.

Earlier, President Prabowo Subianto expressed hope that the worst-case scenario imagined by various parties in the Middle East would not materialise, particularly following the conflict between Iran and the United States and Israel that had lasted approximately two weeks.

Before ministers and state officials at a Full Cabinet Session at the State Palace in Jakarta on Friday (13 March), the President emphasised that the government had taken several steps to anticipate the impact of conflict in the Middle East region, whilst also examining several cost-reduction options.

“We hope the worst-case scenario does not occur in the Middle East, but many forecasts also suggest this could become a very prolonged war,” Prabowo said.

Nevertheless, the President stated that Indonesia remained in relatively safe condition so far.

However, the President reminded his officials to remain vigilant and not become complacent. “Although we feel safe and are not panicking, we must not fail to prepare ourselves for the worst possibility,” the President said.

During the Full Cabinet Session, the impact of the conflict between Iran versus Israel and the United States was also highlighted. Coordinating Minister for Economic Affairs Airlangga Hartarto and Head of the National Economic Council (DEN) Luhut Binsar Pandjaitan both submitted reports directly regarding this matter and its impact on Indonesia.

When presenting his report to the President, Airlangga raised the possibility that the state budget deficit could exceed 3 per cent should the conflict persist for five, six or ten months.

In the government’s modelling, global crude oil prices are predicted to reach 90 US dollars per barrel if the conflict lasts five months, then 97 US dollars per barrel if the conflict extends to six months, and 115 US dollars per barrel if the conflict lasts ten months.

“If we apply this to our budget, which is currently at an Indonesian Crude Price (ICP) of 86 dollars per barrel and exchange rate of Rp17,000, our budget assumption is Rp16,500, and we maintain our growth target of 5.3 per cent. State securities yield would be higher at 6.8 per cent, which would result in a deficit of 3.18 per cent,” Airlangga said.