Prasasti warns of prolonged energy price surge risks for Indonesia

Jakarta — Policy and Programme Director Piter Abdullah from Prasasti has warned that escalation of Middle East tensions could become one of the largest external shocks to Indonesia’s economy in 2026, particularly if energy price increases persist over an extended period.

At the beginning of 2026, Indonesia’s economic outlook still appears reasonably solid, with economic growth expected to reach 5.0-5.3 per cent, supported by relatively stable domestic demand and improving credit growth. However, energy price surges have the potential to alter this dynamic, Abdullah stated in an official statement in Jakarta on Friday.

In recent weeks, geopolitical tensions in the Middle East have raised concerns across global markets, with rising crude oil prices and increasing uncertainty affecting international energy trade routes. The conflict involving Iran, the United States, and Israel has heightened risks of disruption to the Strait of Hormuz, a strategic waterway through which 20-30 per cent of global oil trade passes.

Any disruption to this route could create a global energy supply shock, driving crude oil prices higher and increasing volatility in international energy markets. Abdullah identified Indonesia’s limited strategic energy reserves as a critical vulnerability in such scenarios. With inadequate reserves, policy flexibility becomes severely constrained if global supply disruptions occur.

Indonesia’s strategic oil reserves are estimated to cover only 23-26 days of demand, far below the International Energy Agency’s recommended standard of approximately 90 days of net imports. Whilst this limitation may not be apparent during normal conditions, it significantly increases Indonesia’s energy vulnerability in the event of global supply disruptions.

Rising oil prices will increase production costs across various sectors, reduce household purchasing power, and place pressure on the rupiah’s exchange rate. If energy prices remain elevated for an extended period, the likelihood of Indonesia’s economic growth falling below 5 per cent increases substantially. Prolonged energy pressure could trigger a slowdown in household consumption and higher inflation through increased goods distribution costs, potentially raising risks of capital outflows and destabilising domestic financial markets in more extreme scenarios.

Historical experience demonstrates that external shocks affect domestic economies relatively quickly. During the 2008-2009 global financial crisis, Indonesia’s economic growth remained positive but slowed by approximately 1.4 percentage points within a single year.

Higher oil prices also risk pressuring the rupiah’s stability. Elevated energy costs typically increase energy import requirements, which can worsen the external balance. Rising global uncertainty tends to encourage international investors to shift their portfolios towards safer assets. Emerging market currencies, including the rupiah, frequently experience greater volatility in such situations.

When energy prices rise and global uncertainty increases, pressure on the rupiah typically intensifies. This is influenced not only by domestic factors but also by global capital flow dynamics, Abdullah explained.

Despite these concerns, Prasasti does not view the current situation as a crisis. Indonesia’s macroeconomic fundamentals remain relatively strong compared with previous shock periods, though the current situation still requires careful policy management.

Abdullah believes the government must ensure clear communication on economic policy, particularly regarding strategies to maintain fiscal discipline, manage energy subsidy pressures, and retain investor confidence. Clear economic policy direction is crucial during global uncertainty, as markets assess how the government maintains fiscal stability whilst ensuring continued domestic economic growth.

Prasasti also believes this geopolitical conflict development could affect Indonesia’s economic growth prospects. The government should increase public transparency regarding Indonesia’s economic direction amid major escalation. Clear and timely communication is critical, as the public deserves to understand how the government assesses risks and prepares preventative measures.

The government should also review major national strategic projects if the crisis deteriorates to maintain fiscal flexibility, with project prioritisation becoming essential if external budgetary pressures increase. Finally, consistent communication with investors, including rating agencies and sell-side institutions, must be strengthened, with the government clearly conveying concrete steps taken to safeguard fiscal stability and maintain market confidence.