Jakarta — The escalation of conflict between the United States and Iran has once again heightened global geopolitical uncertainty. Prasasti Center for Policy Studies (Prasasti) assesses that tensions in the Middle East could persist for an extended period and carry implications for global economic stability, including for Indonesia. Prasasti Research Director Gundy Cahyadi stated that the escalation of conflict in the Middle East has the potential to place new pressure on the global economy, particularly through rising energy prices. “At the beginning of the year, Indonesia’s economic outlook was actually still relatively positive, with projected growth in the range of 5.0–5.3 percent. However, the conflict between the United States and Iran is beginning to alter that projection,” Gundy explained.

Global oil prices climbing back above US$100 per barrel increase risks for energy-importing countries, including Indonesia, which still imports a significant portion of its oil needs. “Rising energy prices will increase production costs, weaken consumer purchasing power, and place pressure on the rupiah exchange rate,” Gundy said. If the surge in oil prices persists for a prolonged period, the likelihood of Indonesia’s economic growth falling below 5 percent will become increasingly significant. “The government needs to start shifting from a business-as-usual mode to a crisis mode,” he added.

Indonesia’s vulnerability to global oil price increases is also reflected in its fiscal position. Indonesia’s current strategic oil reserves are estimated to cover only around 23–26 days, far below the International Energy Agency (IEA) recommendation of 90 days of net imports.

In addition, rising oil prices could increase the burden of energy subsidies in the state budget (APBN). According to government simulations, if the average oil price reaches around US$92 per barrel, the 2026 fiscal deficit could widen to approximately 3.6–3.7 percent of GDP, exceeding the 3 percent fiscal deficit limit. “This situation requires more cautious fiscal management, particularly if global energy prices remain elevated,” Gundy said.

Prasasti Policy and Program Director Piter Abdullah added that rising global oil prices will almost certainly place pressure on domestic fuel prices.

According to him, “When global oil prices increase, the government essentially faces two policy options: restraining domestic fuel price increases through larger subsidies, or allowing domestic prices to rise with the consequence of higher inflation.”

“If oil prices increase, there will inevitably be pressure for domestic fuel prices to rise as well, unless the government is willing to bear larger subsidies,” Piter explained.

However, the government’s fiscal space to absorb rising energy costs also has its limits. Efforts to prevent fuel prices from increasing significantly could substantially raise the subsidy burden in the state budget.

On the other hand, if fuel price increases are fully passed through to the market, the impact would be directly felt in inflation. Fuel prices contribute significantly to inflation, both directly and through secondary effects on transportation, logistics, and the prices of other goods.

“With rising oil prices, inflationary pressure will likely increase. At the same time, government subsidy burdens could also expand, thereby intensifying fiscal pressure,” Piter said.

Sharpening Budget Priorities

Amid rising global uncertainty, Piter emphasized that the government must strengthen fiscal discipline and ensure that public spending is directed toward the most strategic programs.

External pressures such as rising energy prices, global market volatility, and the potential for economic slowdown require the government to be more selective in managing the state budget.

“The government needs to ensure that every rupiah of public spending is directed toward programs that generate the greatest economic impact,” he stated. He added that in a geopolitical conflict scenario that could persist for a prolonged period, fiscal policy can no longer be conducted under a business-as-usual approach. Sharpening budget priorities and improving spending efficiency are critical steps to maintaining economic stability. (*)