This Week in the Indonesian Economy (27-5 Mar 2026)

The week of 27 February to 5 March 2026 will be remembered as one of the most consequential in recent Indonesian economic history, dominated by the eruption of an armed conflict involving the United States, Israel and Iran that sent shockwaves through global energy markets and forced Jakarta into a rapid, multi-front response. Against that turbulent backdrop, domestic policymakers were simultaneously managing a credit-outlook downgrade from Fitch Ratings, preparations for the Lebaran exodus, and the early stages of an ambitious energy transition.

The Middle East Shock and Indonesia’s Energy Response

The closure of the Strait of Hormuz by Iran’s Islamic Revolutionary Guard Corps – following US and Israeli strikes on Iranian targets – sent Brent crude to around US$83 per barrel by the week’s end, well above the US$70 per barrel assumption embedded in Indonesia’s 2026 state budget. The disruption was visceral for Indonesia: two Pertamina International Shipping tankers were stranded in the strait, tanker traffic through Hormuz collapsed by roughly 90 per cent according to data cited in multiple reports, and ocean freight costs surged by 50 per cent, according to the Indonesian Logistics Association. In Bangka Regency, panic-buying of fuel broke out, and globally, queues formed at petrol stations from Seoul to Sydney.

The government’s response was swift. President Prabowo Subianto convened a limited cabinet meeting and directed Energy and Mineral Resources Minister Bahlil Lahadalia to prevent fuel shortages under any circumstances. Bahlil confirmed that subsidised fuel prices – Pertalite at Rp10,000 per litre and Biosolar at Rp6,800 – would not rise before Eid al-Fitr, while non-subsidised fuels would follow market mechanisms under the 2022 ministerial regulation. Coordinating Minister for Economic Affairs Airlangga Hartarto echoed this position, saying the APBN would function as a shock absorber. Finance Minister Purbaya Yudhi Sadewa stated that simulations showed the budget could remain within a 3 per cent of GDP deficit ceiling even if oil reached US$92 per barrel, though the government acknowledged that any sharp further escalation would require fiscal recalibration. Deputy Finance Minister Juda Agung quantified the exposure: each US$1 rise in the Indonesian Crude Price widens the deficit by about Rp6.8 trillion.

On supply, Bahlil revealed that Indonesia had already begun phasing in crude oil imports from the United States, under a broader reciprocal trade arrangement in which Indonesia commits to roughly US$15 billion in energy purchases, including LPG, crude and refined fuels. The shift addressed a structural vulnerability: Indonesia’s storage capacity stands at only about 25 days of demand, compared with Japan’s 254 days. Prabowo ordered the construction of new storage infrastructure – with Sumatra identified as the preferred site – targeting an eventual reserve of 90 days. Investors, both domestic and foreign, have reportedly expressed interest, though US-based firms were notably excluded from the consortium. A feasibility study is under way, with construction targeted to begin in 2026. Separately, the National Energy Council’s first session of the year focused on diversifying import routes, and Pertamina mobilised 345 vessels to secure domestic energy supply during Ramadan and Eid.

The geopolitical fallout spread beyond oil. Bali felt the disruption acutely: more than 35 international flights were cancelled at I Gusti Ngurah Rai International Airport over three days, stranding more than 5,000 passengers and causing an estimated daily decline of around 800 foreign visitors, according to Bali Governor Wayan Koster. Paradoxically, some stranded Middle Eastern tourists extended luxury hotel stays, with the government waiving overstay immigration fees for the period. The Ministry of Tourism maintained that overall hotel occupancy in Badung and Gianyar remained broadly stable, ranging between 41 and 80 per cent, and pledged intensified marketing to sustain momentum. Indonesia’s aviation sector, including InJourney Airports, began adapting its operational scope.

Fitch’s Negative Outlook and the Fiscal Debate

Compounding the external pressure, Fitch Ratings revised Indonesia’s sovereign debt outlook from stable to negative on 4 March, while affirming the BBB investment-grade rating. The agency cited rising policy uncertainty, growing centralisation of decision-making, and concerns about the policy mix under President Prabowo’s administration. It projected a 2026 fiscal deficit of 2.9 per cent of GDP – above the government’s 2.68 per cent target – and pointed to the Free Nutritious Meals Programme (MBG) and the Danantara sovereign wealth fund as sources of fiscal risk. Fitch flagged that Danantara’s planned US$26 billion in downstream investments could create contingent liabilities and reduce fiscal transparency, while also noting possible amendments to the State Finance Law as a further risk. Moody’s had taken a similar step earlier in the year.

The government pushed back vigorously. Airlangga argued that not all rating agencies are yet familiar with Danantara’s operating model and that the fund would need time to build a credible track record. On MBG, he cited World Bank and Rockefeller Foundation research suggesting that US$1 invested in nutrition programmes could yield US$7 in long-run returns, a figure also deployed by Coordinating Minister Airlangga in public statements. Bank Indonesia Governor Perry Warjiyo said the outlook revision did not reflect weakened economic fundamentals, pointing to solid growth, contained inflation and a strengthening external position, with foreign reserves at US$154.6 billion at end-January. Meanwhile, the Directorate General of Taxes, under Bimo Wijayanto, expressed confidence that rising receipts in January and February provided a solid foundation for meeting the Rp2,357.7 trillion revenue target, with the Coretax digital tax system cited as a key lever. BRIN’s own study estimated the MBG programme could add Rp14.5 trillion to Rp26 trillion to GDP through higher consumption and investment.

The rupiah came under pressure during the week, touching around Rp16,930 per US dollar at its weakest before recovering modestly to Rp16,875, as Bank Indonesia deployed a combination of non-deliverable forwards, spot interventions and purchases of government securities. The Jakarta Composite Index fell 4.57 per cent on 4 March before rebounding 1.56 per cent the following morning, partly on reports that Iran signalled openness to dialogue and Wall Street recovered.

Energy Transition and Structural Reform

Amid the crisis, the government pressed ahead with longer-term structural moves. President Prabowo formally established an Energy Transition Acceleration Task Force, with Bahlil as chair. The task force is charged with converting up to 100 gigawatts of diesel-fired generation to solar power and converting 120 million petrol motorcycles to electric within three to four years. A subsidy of Rp5 million to Rp6 million per converted motorcycle was announced, and the government is targeting annual conversions of up to 6 million units. A US$1.4 billion investment to build a 50-gigawatt solar component factory – announced via Danantara and confirmed by Investment Minister Rosan Roeslani – is expected to be completed by end-2026, with a prototype 1 megawatt solar plant already operational in Sumenep, East Java.

Separately, Coordinating Minister Airlangga noted that Indonesia will need around 150,000 additional engineers over six years to support digital industry growth, including roughly 15,000 for the semiconductor sector. Indonesia is targeting a place among the top 45 nations in the Global Innovation Index, and MPR Deputy Speaker Eddy Soeparno argued that clean energy must underpin the country’s AI and data-centre ambitions, given the enormous electricity demands of digital infrastructure.

Lebaran Readiness and Domestic Economy

On the home front, the government’s Lebaran preparations were extensive. The Ministry of Transport mobilised 841 ships with capacity for 3.2 million passengers, offered 69,232 free sea-transport tickets across 97 routes, and implemented the Motis motorcycle-by-train programme for the twelfth consecutive year. Ten functional toll roads were activated to ease congestion, a one-way system and odd-even rules were scheduled on Central Java toll roads from 17 to 20 March, and road repair programmes were accelerated in Bekasi, Majalengka, Jambi and elsewhere, with authorities aiming to complete pothole patching by H-10 before Eid. Pertamina deployed 7,885 public fuel stations in 24-hour operation, with Pertalite consumption expected to rise 12 per cent during the holiday period.

Staple food prices remained a concern. Beef was trading near Rp122,000 per kilogram in Pamekasan, East Java, and premium rice reached Rp15,000 per kilogram in Sukabumi, with the National Food Agency blaming middlemen for the markup. Subsidised market operations, Ramadan bazaars and cross-ministry price monitoring were deployed in Bandung, Lamongan, Semarang and Kupang to cushion inflationary pressure ahead of Eid.

Looking Ahead

The coming weeks will test the durability of Indonesia’s policy buffers on multiple fronts. The key variable remains the trajectory of the Iran-US-Israel conflict: a protracted closure of the Strait of Hormuz would push oil prices toward and potentially beyond US$100 per barrel, straining the APBN subsidy envelope, weakening the rupiah further and potentially dampening the Lebaran consumption rebound that the government has been carefully cultivating. The two stranded Pertamina vessels in Hormuz add a diplomatic dimension that Jakarta is managing through the Foreign Ministry. Domestically, the Fitch outlook revision will keep pressure on the government to demonstrate fiscal discipline, accelerate Coretax implementation and establish Danantara’s governance credentials – all while sustaining the ambitious social and energy-transition programmes that define the Prabowo administration’s early tenure. Indonesia enters the Eid season with its fundamentals broadly intact but its margin for error meaningfully narrower than at the start of the year.