The Indonesian Economy Is Threatened To Slow Down If The Iran-Israel Conflict Continues

JAKARTA - Bank Permata economist Josua Pardede predicts that the geopolitical situation in the Middle East will heat up and continue to have an impact on Indonesia's economic conditions.

Josua explained that as the geopolitical situation in the Middle East escalated between Iran and Israel continued, world oil prices would soar, posing a high threat of global inflation and overshadowing the global economy.

Therefore, according to Josua, oil importing countries such as Indonesia can 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," he told VOI, Wednesday, April 17.

In addition, Josua said that the increase in world crude oil prices could also provide fiscal pressure for Indonesia because fiscal policy would act as a damper of shocks through energy subsidies and compensation.

According to Josua, this situation can cause a widening fiscal deficit amid declining state revenues due to the normalization of commodity prices, thereby increasing budget financing, which in turn can increase the yield of Indonesian bonds.

Therefore, according to Josua, the resurgence of global inflation threats could deter major central banks from cutting their policy interest rates.

"The Fed will probably continue to maintain a continuous higher-for-longer policy if inflation continues to be above the target of 2 percent due to rising energy prices," he said.

Josua said the high rate of global policy interest rates, coupled with pressure on domestic inflation and a widening current account deficit, would narrow BI's space to reduce BI-rate in the near future.

On the other hand, Josua said that the increase in inflation rate will reduce people's purchasing power which will have an impact on household consumption growth. Fiscal policy spaces that narrow down due to widening the deficit will limit productive government spending.

Josua said the narrowing monetary policy space could also reduce economic liquidity conditions, including banking, so that interest rates were difficult to drop, thereby increasing loan costs for the business world, and resulting in slowing down 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 concluded.