The Shrinking Economic Impact of Wars Worldwide

Back in the days of David Harvey’s The Condition of Postmodernity (1989), the author explained how the acceleration of economic life and the technology of global capitalism compress space and time, making the world feel ‘smaller’. Global economic integration has become part of daily life for countries around the world, characterised by rising interdependence. All events, even those not directly connected with Indonesia, will have effects. The escalation of conflict in the Middle East, sparked by the open confrontation between Iran and Israel–the United States, will not only ripple through the countries involved but also be felt across the world, including Indonesia. The blast of missiles that hit Tehran and Iran’s retaliation against Israel and the United States in the Middle East will surely shake stock markets and destabilize economies. For Indonesia, geographically distant from the war’s epicentre, geopolitics is the motor of the economy, and when that wheel stalls due to war, the impact is felt in the state budget. The outbreak of war in the Middle East can be expected to trigger a spike in world crude prices due to fears of disruption on vital trading routes. This is the first danger signal for our budget stance. One can imagine what happens when global oil prices rise sharply; all budget assumptions would have to be revised, and the fiscal burden would increase further. What should be done so that pressure on our budget does not cause Indonesia to collapse?

Impact of war: Indonesia is currently a net importer of oil. When world oil prices rise, the cost of importing fuel becomes bound to rise as well. The 2026 Budget, initially prepared with oil price assumptions (for example around $70 per barrel), becomes highly vulnerable and needs adjusting.

Broadly, three main impacts would arise from a war in the Middle East: First, if fighting escalates, energy subsidies for fuel and electricity could rise dramatically, potentially increasing the burden by tens or even hundreds of trillions of rupiah. Imagine money that could be allocated to infrastructure, education, or social assistance having to be diverted to subsidise fuel so that domestic prices do not strangle the public. This is the classic dilemma: choosing to maintain purchasing power or defend the deficit. Currently Iran has decided to close the Strait of Hormuz. This would trigger a global energy crisis by halting around 20% of world supply and it is not impossible that oil prices could exceed $100-$150 per barrel. Around 20%-30% of the world’s oil and gas passes through that strait, so the closure would remove 20-21 million barrels per day from supply, spurring price spikes.

For Indonesia, this would mean higher fuel subsidies/APBN, a weaker rupiah, higher inflation due to increased logistics costs, and disruptions to food/fertiliser imports. The closure of the Strait of Hormuz would, technically, disrupt shipments of commodity goods, raising global logistics costs and potentially causing shortages of fertilisers.

Second, the war’s effects would cause inflation to rise while purchasing power falls. Higher logistics costs due to higher fuel prices would trigger price rises for staple foods and consumer goods, which would ultimately erode purchasing power. Experience has long proven that wars and regional conflicts always threaten inflation. Energy price rises would ripple into logistics costs and the prices of essential goods. Imported inflation would pressure household purchasing power. The government must calculate carefully whether to let fuel prices rise, which risks high inflation, or hold them down with the risk of an expanded fiscal deficit beyond the target.

As a result of war, Indonesia now stands at a crossroads like facing a Sima-lakama fruit; whatever decision is taken, the outcome will risk destabilising the national economy. In general, war and the closure of the Strait of Hormuz would risk halting energy supplies and causing an economic crisis, especially for developing countries like Indonesia.

Third, there would be a weakening of the rupiah. The rupiah has not been in good shape recently; it has hovered around Rp16,000 per US dollar, even breaching the psychological threshold of Rp17,000. War in the Middle East would certainly press the rupiah lower. Geopolitical conflict tends to push global investors into safe-haven assets like the US dollar. When the rupiah depreciates against the dollar, the government’s external debt servicing burden rises, and import costs (including oil imports) become more expensive. That is the real challenge for the stability of our budget. Wars anywhere always trigger a domino effect: rising global oil prices, a weaker rupiah, and higher import costs for fuel.

Way out: Fiscal adaptation. In addressing the rising escalation of war in the Middle East, Indonesia must not panic and should promptly prepare anticipatory measures to dampen the war’s impact. Strategic steps are essential to prevent Indonesia from collapsing.