Indonesia's Fiscal Challenges Amid Rising Oil Prices Due to Middle East Conflict

Indonesia faces significant fiscal challenges as the ongoing conflict in the Middle East, particularly the war involving Iran, drives oil prices higher. Analysts warn that escalating oil prices could inflate the country's fuel subsidy bill, which is already under scrutiny from global ratings agencies and investors. The conflict has disrupted tanker traffic in the Strait of Hormuz, pushing Brent crude prices above $85 per barrel, marking a notable increase since July 2024. Indonesia, a major fuel importer that maintains domestic price caps through subsidies, is particularly vulnerable to these price fluctuations.

South China Morning PostReutersIndonesia will keep budget deficit below 3% of GDP as Middle East conflict lifts oil prices

In response to the potential economic fallout, Finance Minister Purbaya Yudhi Sadewa has indicated that Indonesia is prepared to adjust its budget expenditures to keep the fiscal deficit below 3% of GDP. The government has projected that if global oil prices reach $90 to $92 per barrel, the deficit could widen to approximately 3.6% of GDP. This situation poses a challenge to President Prabowo Subianto's ambitious goal of achieving 8% GDP growth, especially as the Indonesian rupiah and stock index have already been among the worst performers in Asia in 2026.

Indonesia will keep budget deficit below 3% of GDP as Middle East conflict lifts oil pricesReuters

Purbaya, who succeeded the respected Sri Mulyani Indrawati, is perceived as a pro-growth figure tasked with stimulating the economy. However, his approach raises concerns about fiscal stability among investors. The finance ministry has outlined contingency plans, including potential cuts to expenditures that would minimally impact the economy, such as scaling back on the free meals program, which could save around 100 trillion rupiah ($6 billion).

Indonesia will keep budget deficit below 3% of GDP as Middle East conflict lifts oil prices

The fiscal situation has drawn the attention of global rating agencies. In February, Moody's downgraded Indonesia's credit rating outlook to negative, citing concerns over social programs and fiscal discipline. Fitch Ratings has also engaged with Indonesian officials regarding the implications of the new sovereign wealth fund, Danantara, on the country's fiscal health. Purbaya reassured that Danantara's debt would not affect national financing, emphasizing the importance of optimizing fiscal conditions for economic growth.

ReutersIndonesia will keep budget deficit below 3% of GDP as Middle East conflict lifts oil prices

There are discrepancies regarding the exact impact of rising oil prices on Indonesia's fiscal health. While some sources indicate a potential deficit increase to 3.6% of GDP, others suggest that the government is committed to maintaining the deficit below 3%. Additionally, the extent to which the conflict in the Middle East will continue to affect oil prices remains uncertain.

Reuters

• “Assuming the worst case, if the oil price goes as high as $90 to $92 per barrel, in those conditions, without adjusting our current budget, the deficit will increase to around 3.6% of GDP,” — Purbaya Yudhi Sadewa, Finance Minister

Reuters

• “Growth is important. Fiscal sustainability is important. But the most important thing is to optimize the existing fiscal conditions in creating economic growth,” — Purbaya Yudhi Sadewa, Finance Minister

Reuters

• “They (Fitch) are concerned about how Danantara affects our fiscal condition,” — Purbaya Yudhi Sadewa, Finance Minister

Indonesia will keep budget deficit below 3% of GDP as Middle East conflict lifts oil prices

As Indonesia navigates these economic pressures, the government's ability to balance fiscal discipline with growth ambitions will be closely monitored by both domestic and international stakeholders.

Reuters