Indonesia faces fiscal squeeze as Iran war drives up oil prices

Indonesia could face a sharp fiscal squeeze if the US-Israel war on Iran pushes oil prices higher, analysts warn, as this risks inflating the country’s fuel subsidy bill at a time when global ratings agencies and investors are already scrutinising Jakarta’s budgetary discipline. A prolonged war could force policymakers into a difficult choice: maintain fuel subsidies and risk breaching the legal deficit ceiling – potentially unsettling investors further – or cut funding to keep the budget within limits but fuel inflation instead. The conflict has disrupted tanker traffic in the Strait of Hormuz – a key shipping route for Gulf energy exports – pushing Brent crude prices above US$85 per barrel this week for the first time since July 2024. For Indonesia, which imports large volumes of fuel but caps domestic prices through subsidies, higher oil prices quickly translate into pressure on the state budget. The government has already allocated 210.1 trillion rupiah (US$12.4 billion) for energy subsidies this year, a 14.5 per cent increase from last year’s budget. “Assuming the worst case, if the oil price goes as high as US$90 to US$92 per barrel, in those conditions, without adjusting our current budget, the deficit will increase to around 3.6 per cent of GDP,” Finance Minister Purbaya Yudhi Sadewa said in an interview with Reuters on Tuesday. US President Donald Trump has said the war in Iran could last up to five weeks, or “far longer” if necessary. A wider deficit could further unsettle investors, who have already placed Indonesia’s US$1.4 trillion economy under heightened scrutiny in recent weeks. Credit warnings On Wednesday, credit rating agency Fitch revised Indonesia’s sovereign credit outlook to negative from stable. Last month, Moody’s also changed the country’s outlook to negative, citing concerns about policy uncertainty and government spending on President Prabowo Subianto’s priority programmes, including a free nutritious meals initiative and the Red and White village cooperative scheme. Both Fitch and Moody’s maintained the country’s investment-grade ratings. In January, global index provider MSCI halted changes to Indonesian stock listings due to transparency issues, wiping US$120 billion from the market value of Indonesia’s bourse. For some economists, the outlook downgrades should serve as a warning for Jakarta to tighten fiscal discipline and prepare the budget for external shocks such as the Middle East conflict. “This is like a structural assessment. There is pressure on [the state budget] from weakening purchasing power and weak tax revenue, while government spending is being shifted to inappropriate places,” said Bhima Yudhistira, executive director at think tank Centre of Economic and Law Studies. “My concern isn’t just Moody’s and Fitch, but S&P could also downgrade our rating in July when they publish their [outlook on Indonesia].” Wijayanto Samirin, a senior economist at Paramadina University, said S&P Global Ratings was “likely to lower its outlook for Indonesia to negative, which will be difficult for us since S&P is the market leader”. On February 26, the credit-ratings agency issued a warning about mounting fiscal pressures in Indonesia, particularly due to rising interest payments on government debt and weakening state revenue, which led to the budget deficit of 2.9 per cent of gross domestic product last year. To prevent a widening deficit, Jakarta should slash the budget for Prabowo’s socialist programmes and shift it to energy subsidies if it wants to avoid inflation, particularly ahead of Eid ul-Fitr, the country’s busiest holiday and travel season, the economists say. “For every US$1 increase in oil prices, the subsidy must be increased by 3 trillion or 4 trillion rupiah for one year. If the budget for free meals and village cooperative programmes cannot be shifted, it will be hard for us to manoeuvre,” Wijayanto said. Rising oil prices mean the government needs 314 trillion rupiah for energy subsidies, according to Bhima. Fuel scarcity Purbaya told Reuters that the government was willing to scale back the US$20 billion free meals scheme to save about 100 trillion rupiah. The finance minister also expressed confidence that Indonesia would meet Prabowo’s ambitious 8 per cent economic growth target, and that the 3 per cent deficit ceiling would not be breached “any time soon or in the future”. Oil supply emerged as a further point of concern after Bahlil Lahadalia, minister of energy and mineral resources, revealed that Indonesia had emergency oil reserves equivalent to only 23 days of consumption. If we import so much fuel, where will we store it? Bahlil Lahadalia, Indonesian minister of energy and mineral resources He said, however, that this was “still above the national minimum standard of 21 days”. “In fact, our storage can only reserve oil [equivalent to] maximum of 25 to 26 days’ [consumption]. No more,” Bahlil said during a news briefing on Tuesday. “If we import so much fuel, where will we store it? That’s our problem.” According to Bahlil, up to 25 per cent of Indonesia’s crude oil imports come from the Middle East, which also accounts for 30 per cent of the country’s liquefied petroleum gas imports. To add to the problem, two oil tankers belonging to state energy firm Pertamina were still stuck in the Strait of Hormuz as of Friday. To ensure availability, Indonesia would boost oil imports from the US, Bahlil said. Fuel scarcity was a “more concerning” issue than rising prices, said Piter Abdullah Redjalam, policy and programme director at think tank Prasasti Centre for Policy Studies. “If the supply chain is disrupted for a long time, and if countries increasingly tend to focus more on their own interests, fuel will remain scarce regardless of the price,” he said. “The government must inform the public about the potential risks and what steps they will take. It could also perhaps encourage energy conservation so we can all face this situation with peace of mind.”

Indonesia faces fiscal squeeze as Iran war drives up oil prices

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Higher oil prices would mean bigger fuel subsidies, piling on the pressure on a budget that is already under investor scrutiny

Higher oil prices would mean bigger fuel subsidies, piling on the pressure on a budget that is already under investor scrutiny