Bank Permata Economist: Indonesia's Fiscal Deficit Potentially Widens The Impact Of The Iran-Israeli Conflict

JAKARTA - Economist Josua Pardede said Indonesia's fiscal deficit has the potential to widen in order to reduce the shocks caused by the conflict between Iran and Israel that could trigger a surge in world oil prices.

"The increase in world crude oil prices can also provide fiscal pressure for Indonesia because fiscal policy will act as a damper of shocks through energy subsidies and compensation," said Josua in Jakarta, quoted from Antara, Wednesday, April 17.

This situation can cause a widening fiscal deficit amid declining state revenues due to normalization of commodity prices, thereby increasing budget financing, which in turn can increase Indonesia's bond yields.

The head of Bank Permata economist said that when world oil prices soared, the threat of global inflation was again looming over the global economy. Oil importing countries such as Indonesia could experience an increase in the pressure of imported inflation.

With the weakening of the global economy and normalization of commodity prices, which have a negative impact on export performance, Indonesia's trade balance surplus can quickly turn into a deficit, thus triggering widening the current account deficit and putting pressure on the rupiah exchange rate.

Josua further said that the fiscal policy space that has narrowed due to widening the deficit will limit productive government spending.

Meanwhile, the narrowing monetary policy space can also reduce economic liquidity conditions, including banking, so that interest rates are difficult to drop, which can increase loan costs for the business world, leading to a slowdown in investment activities.

"The increase in world oil prices will also weaken net exports. In the end, Indonesia's economic growth could be threatened with weakening or slowing down," he said.

According to him, the resurgence of global inflation threats could deter key central banks from cutting their policy interest rates.

The central bank of the United States (US) or the Fed may continue to maintain its high-interest rate policy for a longer time (higher-for-longer) continuously if inflation continues to above the target of 2 percent due to rising energy prices.

The high rate of global policy interest rates, coupled with domestic inflationary pressures and a widening current account deficit, will narrow Bank Indonewia (BI)'s space to lower BI-Rate interest rates in the near future.

In addition, rising inflation rates will reduce people's purchasing power which will have an impact on household consumption growth.