Oil Prices Soar, State Budget Deficit Potentially Widening

JAKARTA - Minister of Finance Purbaya Yudhi Sadewa stated that the government had conducted a risk simulation (stress test) to anticipate the impact of rising world crude oil prices on the State Budget (APBN) 2026.

Based on the results of the Ministry of Finance's simulation, if the world oil price increases to reach 92 US dollars per barrel, the state budget deficit has the potential to widen to around 3.6 percent of the Gross Domestic Product (GDP) and this figure exceeds the safe fiscal limit that has been maintained by the government.

"We have exercised that if the average oil price is 92 US dollars a year, the deficit will be 3.6 percent of GDP, we will take steps so that it does not happen there," he told the media, quoted Sunday, March 8.

According to him, the simulation uses the assumption of high oil prices throughout the year because the fuel oil (BBM) needs are calculated based on the average annual price.

He added that in the face of this possibility, the government has prepared a number of mitigation steps to hold back the widening of the deficit, one of the options considered is to make budget savings on several state spending items that are considered to have a relatively small impact on the economy.

"Where can it be saved? For example, savings in the MBG program," said Purbaya.

However, he emphasized that the government has experience dealing with global oil price spikes in the past where in the period 2012-2013, world oil prices reached around US$150 per barrel, but Indonesia's economy was still able to survive.

He also reminded that in 2005 the government had raised the price of fuel by 127 percent and the subsidy, still could be carried out as long as it was balanced with other policies that maintained stability and economic growth.

"So every time there is a certain policy that has to be carried out, there must be another policy that still maintains economic growth," he said.

However, he assessed that the worst-case scenario was not necessarily the case and if the price of oil was in the range of 72 US dollars per barrel, the country's fiscal condition was still relatively safe.

In addition, he also assessed that oil prices that are too high usually do not last long and this is because producer countries tend to increase production when prices soar.

For example, the United States has reopened oil exploration in Alaska, while other countries such as Venezuela also have the potential to increase world oil supplies.

"If the price of oil is too high, the world community cannot pay. Demand slows down, the economy slows down, oil demand decreases, prices go down again," he said.