Indonesia could face a sharp fiscal squeeze if the US-Israel war on Iran pushes oil prices higher, analysts warn, as this could inflate the country’s fuel subsidy bill at a time when global ratings agencies and investors are already scrutinising Jakarta’s monetary 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 to about US$85 per barrel on Friday, near its highest price since 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.
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