Jakarta. Bank Indonesia (BI) is closely monitoring the potential ramifications of the Gaza conflict on the national economy, taking into account the context of a slowing global economy and rising global uncertainty.

The central bank's Head of Economic and Monetary Policy, Firman Muchtar, said that the global economy is set to experience a decline with a widening divergence.

"We initially expected the US to slow down, but it turns out their domestic demand is strengthening. Meanwhile, China, which was expected to improve with the easing of restrictions, is actually on a declining trajectory," Firman stated at the BNI Investor Daily Summit 2023 held in Hutan Kota by Plataran, Senayan, Jakarta, on Tuesday.

Another notable factor is the escalating geopolitical tension. Firman said that recent international conflicts in the Middle East have led to a spike in energy prices, compounded by the upward trend in food prices.

"The latest escalation in geopolitics is the conflict in the Middle East, which has driven an increase in oil and energy prices, followed by rising food prices. These two factors, along with other strategically important commodities, have had an impact on the domestic economy," said Firman.

Earlier in the day, President Joko "Jokowi" Widodo predicted that global crude oil prices could reach $150 per barrel from the current $90 per barrel. This increase would occur if the conflict between Israel and Hamas escalates.

"I checked yesterday, the price of Brent oil was still at $89, but if, as I mentioned earlier, it escalates, we don't know if it can reach $150. This is what we need to be cautious about, both on the monetary and fiscal fronts," Jokowi said in his opening remarks at the business summit

Furthermore, Firman said growth is expected to slow due to tight monetary policies in the United States expected to persist until the first semester of 2024.

"The fiscal deficit situation in the United States is expected to expand and will require more bonds, eventually leading to increased printing of the US dollar," he said.

Furthermore, the fiscal situation in the US, with its growing deficits, will stimulate the issuance of more bonds. Firman observed that this will lead to an increase in the yield of the US dollar, widening the divergence further.

Firman said he believed that these factors will prompt investors to start reallocating their portfolios. As a result, the escalation will not only increase the shift to safe havens like the US but also transform the nature of assets, with the majority leaning towards liquidity.

As a result, the phenomenon of "cash is the king" has emerged, causing the US dollar to strengthen globally. In practical terms, the economic downturn affects not only Indonesia but also many other countries.

Moreover, the exchange rates in most emerging markets are predicted to strengthen significantly. This landscape is a matter of concern for BI, as it will impact Indonesia's external sector resilience.

"We see that the current account could become more challenging amid falling global prices. Nevertheless, as of now, BI still perceives it as being at a healthy level. What is of concern is the shifting capital inflows and changing investor risk appetite. Hence, we encourage global portfolio readjustment, including investments in Indonesia," Firman concluded.