Indonesia Braces for Economic Strain as US-Iran Conflict Escalates

Jakarta, Indonesia – Indonesian markets reopened on Wednesday, March 25, 2026, after a week-long holiday, facing a complex economic outlook shaped by escalating tensions in the US-Iran conflict. Investors are carefully weighing the potential impacts of the conflict, alongside existing concerns regarding Indonesia’s fiscal health and governance risks.

Rising Oil Prices and Budgetary Pressures

The primary concern for Indonesia’s economy is the surge in global oil prices. The conflict between the United States and Israel against Iran has already begun to impact crude prices, climbing above US$80 per barrel on March 3-4, 2026, up from approximately US$70 when initial attacks began on February 27, 2026 . Indonesia, as a net importer of crude and refined fuels, is particularly vulnerable to these price increases.

The Indonesian government faces a difficult trade-off: absorbing the increased costs through energy subsidies or passing them on to consumers. Both options present significant challenges. Maintaining subsidies will strain the state budget, although increasing prices could fuel inflation and political unrest. According to Susiwijono Moegiarso, Secretary of the Coordinating Ministry for Economic Affairs, for every US$1 increase in the Indonesian Crude Price (ICP), government spending must rise by Rp10.3 trillion due to energy compensation subsidies .

While higher oil prices do generate additional non-tax state revenue (PNBP) from the oil and gas sector, this increase is insufficient to offset the rise in spending. Every US$1-per-barrel increase yields approximately Rp3.6 trillion in additional revenue, resulting in a net deficit widening of roughly Rp6.7 trillion per US$1 hike .

Beyond Oil: Supply Chain Disruptions and Inflation

The impact of the US-Iran conflict extends beyond oil prices. Disruptions to global supply chains are already being felt, pushing up the cost of commodities beyond energy. This poses a risk of broader inflationary pressures within Indonesia. Many industrial raw materials are imported, and increased costs will inevitably translate to higher prices for consumers and businesses alike .

Fertilizer markets are particularly sensitive, with rising energy prices and potential production disruptions in the Middle East impacting availability and cost. This is a significant concern for Indonesia’s agricultural sector, where millions rely on farming for their livelihoods . Higher input costs could reduce margins for smallholders and lead to lower yields or increased food prices.

Indonesia Seeks Budget Savings

In response to these growing economic risks, Indonesia is actively seeking to implement an estimated 80 trillion rupiah (US$5 billion) in budget savings . This measure aims to bolster the country’s financial resilience and mitigate the potential fallout from the escalating conflict.

Managing the Economic Fallout

Experts suggest that strengthening intra-regional trade and production networks could help reduce Indonesia’s exposure to external shocks . The key will be effective management of the economic consequences, revealing underlying strengths and weaknesses within the Indonesian economy.