US and Israel Strike Iran; Indonesia Faces Major Economic Dilemma
SPECULATION regarding “Alert Status One” has occupied public discussion in recent weeks following Military Commander General Agus Subiyanto’s announcement that Indonesia was placed on Alert Status One. Controversy emerged regarding the urgency of establishing such status, leading to the withdrawal of Alert Status One and its replacement with the term “Heightened Preparedness.”
International relations and investment observer Zenzia Sianica Ihza argues that Alert Status One would be more appropriately applied to Indonesia’s economic condition following geopolitical tensions in the Middle East. The conflict between the United States and Israel with Iran has the potential to escalate into a prolonged open conflict.
“One of the most feared scenarios by global markets and already undertaken by Iran is the closure of the Strait of Hormuz, a narrow shipping channel in the Persian Gulf that has long served as the lifeline for global energy distribution,” Zenzia stated in Jakarta on Saturday, 14 March.
She noted that approximately 20% of global oil supplies pass through this strait each day. Should this route be disrupted, the impact would not only be felt by Middle Eastern nations but would also shake global economic stability. The global energy market responded immediately with crude oil price surges reaching US$115 per barrel, the highest level since 2020.
For Indonesia, she argued, this situation is not merely a geopolitical issue on the other side of the world. It represents an alert status signal for national economic stability. The reason is that surging global oil prices directly constrain Indonesia’s fiscal space. Under the 2026 national budget macro assumption, Indonesia’s crude price (ICP) is set at approximately US$70 per barrel. A difference of more than US$20 from this assumption creates significant pressure on the state budget.
“Many parties calculate that each one-dollar increase per barrel of oil is estimated to add Rp6.8 trillion to the budget deficit. If oil prices approach or even breach 100 dollars per barrel, the potential additional fiscal burden could reach hundreds of trillions of rupiah,” she explained.
This situation, in Zenzia’s view, places the government in a major dilemma between maintaining fiscal stability or sustaining energy subsidies to protect public purchasing power.
In such circumstances, Indonesia’s economic policy cannot operate in normal mode. Bold measures are required to maintain fiscal stability, curb inflation, whilst preserving public purchasing power. Surging oil prices are almost always followed by increases in goods and service prices.
Energy is a major cost component in production and distribution. When oil prices rise, transportation costs increase, logistics prices surge, and ultimately basic commodity prices are pushed upward. Energy inflation can quickly spread into food inflation and core inflation.
“Indonesia has bitter experience with this matter. Each rise in energy prices is often followed by pressure on public purchasing power, especially among lower-middle-income groups,” she explained.
According to her, if the Middle East conflict persists and global energy supply is disrupted, Indonesia risks facing a dangerous combination: high inflation, widening fiscal deficits, and slowing economic growth.
In economic terms, this is called stagflation, a situation where high inflation occurs alongside economic slowdown.
Emergency Measures
Zenzia further explained that the first step the government must take is to undertake significant state budget efficiency. Government spending must be focused only on programmes truly related to public welfare. In times of global crisis, the government cannot afford to maintain ceremonial or non-priority spending.
State spending should be directed toward strategic sectors such as education, health, social protection, food security, energy, poverty alleviation, and basic infrastructure development that supports economic activity.
Programmes lacking direct impact on public welfare must be postponed or reduced. This efficiency is not merely administrative economy but rather a strategy to maintain fiscal discipline so deficits do not exceed dangerous limits to economic stability.
The second step is to accelerate energy transition. Global energy crises often provide momentum for nations to reduce dependence on fossil fuels.
Indonesia actually possesses significant potential in renewable and new energy, though its utilisation remains relatively limited.
Solar energy development through solar power plants (PLTS) can be expanded, both for industrial and household needs. Hydroelectric potential through hydropower plants (PLTA) is also substantial given Indonesia’s numerous river resources. The faster Indonesia reduces oil consumption, the smaller the impact of global energy price volatility on the national economy.
The third step is to ensure economic wheels continue turning through appropriate economic stimulus. In situations of global uncertainty, the domestic sector must become the primary support for economic growth. The government must accelerate economic deregulation by eliminating various regulations that hinder investment and business activity.
Small and medium enterprises (SMEs) must be the primary focus in this strategy. This sector absorbs most of the national workforce and serves as the backbone of the domestic economy. With appropriate incentives, such as access to cheap financing, ease of licensing, and digitalisation support, SMEs can actually grow amid global crisis.
History demonstrates that strong domestic economies often serve as the lifeline when global economies experience shocks.
The subsequent step is to re-evaluate various international trade agreements that could burden the state’s fiscal position. One that merits review is the trade agreement between Indonesia and the United States known as an Agreement on Trade-Related Investment Measures.