Thursday, May 30, 2024 | 18:59 WIB

Analyzing the impact of rising tensions in the Middle East

Jakarta, IO – The scale of the Iran-Israel conflict escalates uncertainty and affects will be changing global dynamics in days to come. The international community is indirectly forced to closely observe the course of the dispute between the two countries. Like it or not, Indonesia must work hard to accurately identify new issues and challenges, including a prediction of worst-case scenarios of escalating conflict in the Middle East. 

On a national level, Indonesia has gained reassurance, following the declaration issued by the General Election Commission (KPU) about the President-elect and Vice President-elect in the 2024 presidential election, on Wednesday, April 24, 2024. Prabowo Subianto and Gibran Rakabuming Raka will respectively serve as President and Vice President from 2024 to 2029. With this sense of security, Indonesia can focus even more intensively on the impacts of escalating tensions in the Middle East aroused by the Iran-Israel conflict. 

Obviously, Indonesia and the international community continue to work and persuade both Iran and Israel to restrain themselves and not escalating their conflict into open warfare capable of resulting in mass casualties. To prevent humanitarian disasters resulting from the conflict, Indonesia needs to exercise its free and active foreign policy approach. 

Regardless of the scale of conflict between the two countries, war will always have consequences. Indonesia, like many other countries, has been impacted by the rise in oil prices. For example, Indonesia must seek cheap fuel oil (BBM) to keep the current year’s State Revenue and Expenditure Budget (APBN), particularly the fuel oil subsidy budget, under control. 

Apart from being impacted by crude oil price increases, Indonesia is also facing a surge in the US dollar exchange rate – signifying a depreciation of the Indonesian Rupiah. A steady increase steadily in recent months saw the dollar peak in April 2024, when the Rupiah surpassed IDR 16,000. This imbalance constantly puts pressure on the State Budget, particularly in terms of spending and fuel subsidies, as well as the increasing cost of interest payments on foreign debt. 

Bambang Soesatyo
Bambang Soesatyo, Speaker of the People’s Consultative Assembly (MPR)

Like many other countries, Indonesia must focus on the negative consequences of the Iran-Israel conflict, including worst-case scenarios of Middle East tension, as the scope of the regional conflict might potentially escalate, reflected in the fact that the Israel-Hamas conflict continues to cause suffering for Palestinian civilians. The attacks on Palestinian non-combatants seems to be lengthy as not many countries in the region are taking the initiative or contributing to any resolution. Palestine seems to be left alone, with some countries in the region refusing to accept Palestinian refugees. 

Focusing on observing the negative impacts of escalating tensions in the Middle East region enables Indonesia to minimize the effects of various emerging and unavoidable issues. For example, consider the impact of increased crude oil prices on Rupiah devaluation. The current escalation of hostilities in the Middle East certainly affects global supply chains. 

Rupiah depreciation generally leads to a significant rise in the price of imported fuel oil. High energy prices will raise production costs in the industrial sector (from industrial raw materials prices) and goods and services sectors, especially for imported products. Food prices are also likely to rise. If the people’s income remains low while the price of goods and services soars, public purchasing power will weaken, as consumption shrivels, resulting in accelerated inflation. 

Global crude oil prices have surged during the third week of April 2024. Brent crude oil prices rose by 3.5 percent, to $90.14 per barrel and West Texas Intermediate (WTI) crude oil rose by 3.61 percent to $85.80 per barrel. Meanwhile, with the Rupiah exchange rate now at IDR 16,000 per US dollar, potential fluctuations are caused by two factors: the policy of the US central bank, the Federal Reserve (Fed)-regarding benchmark interest rates and the Iran-Israel conflict. 

As everyone knows, the Fed is currently implementing a high-interest-rate policy. Meanwhile, the Iran-Israel conflict has prompted investors to withdraw funds from Indonesia and other countries. The dwindling liquidity of the US dollar in the country and the increased need for US dollars for fuel imports have caused the US dollar exchange rate to continue to skyrocket. 

Tutuka Ariadji, Director General of Oil and Gas at the Ministry of Energy and Mineral Resources (ESDM), has presented a description to help everyone better comprehend the problem. He explains that as crude oil prices rise and the Rupiah weakens against the US dollar, energy subsidy expenditure rises. Every one (1) US dollar increase in crude oil prices results in an increase of energy subsidy and compensation by around IDR 4.5 trillion, and for every IDR 100 Rupiah depreciation against the US dollar, it leads to an increase in energy subsidies of around IDR 2.5 trillion to IDR 3.5 trillion. 

The average national fuel consumption has been increasing from year to year. Indonesia needs no less than 72 million kiloliters (KL) of fuel each year. Unfortunately, domestic production volume is only 39 million KL, while the rest has to be imported. Statistics Indonesia (BPS) records that fuel imports in 2022 were valued at 24.07 billion US dollars, up 67 percent compared to the import value in 2012, which was 14.39 billion US dollars. 

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According to BPS, the 2022 fuel import bubble was triggered by an increase in oil prices and oil products. Anyone can draw conclusions from this record concerning the pressures on the current year’s State Budget, particularly for fuel spending and subsidies. 

Apart from fuel issues, the current uncertainty will also affect global food prices and impact Indonesian people as customers who continues to import rice, wheat, sugar, meat, corn, and soybeans. According to BPS the value of imported food commodities has significantly increased throughout 2023. 

The unresolved conflict between Iran-Israel conflict has alarmed many countries into calculating the impact of the conflict, especially concerning the global economy. President Joko Widodo and his ministers will certainly work with the transition team of the elected president-vice president (Prabowo-Gibran) to focus on observing various issues that develop as a result of the Middle East’s escalating tensions.