Jakarta. The recent escalation of tensions between Iran and Israel has the potential to significantly impact Indonesia's economy, potentially leading to a slowdown and causing the rupiah to weaken to Rp 17,000 per dollar ($1.06).

Bhima Yudhistira, the Executive Director of the Center of Economic and Law Studies (Celios), outlined four major consequences of the Iran-Israel conflict on Indonesia's economy.

Firstly, the conflict may result in a 4.4 percent year-on-year increase in crude oil prices, currently standing at $85.6 per barrel. Iran, as the fourth-largest producer within the Organization of the Petroleum Exporting Countries (OPEC), currently produces over 3 million barrels per day. Consequently, disruptions in Iran's oil production and distribution are anticipated.

"The escalation in oil prices could widen energy subsidies, thereby leading to the depreciation of the rupiah exchange rate," explained Bhima Yudhistira on Sunday.

Oil prices experienced a decline during trading on Monday, as market participants reduced risk premiums following Iran's attack on Israel late Saturday. Brent futures for June delivery dropped by 20 cents, or 0.2 percent, to $90.25 a barrel, while West Texas Intermediate (WTI) futures for May delivery decreased by 33 cents, or 0.4 percent, to $85.33 a barrel.

Secondly, the conflict could prompt a shift of foreign investment away from developing countries, with investors seeking safer assets like gold or the US dollar. Consequently, the rupiah may weaken to Rp 17,000 per US dollar, from the current level of Rp 15,000.

Thirdly, Indonesia's export performance could suffer, particularly in key markets such as the Middle East, Europe, and Africa.

"This situation could lead to a slowdown in Indonesia's economic growth to around 4.6-4.8 percent in 2024," said Bima. While the government targets a growth rate of 5.2 percent for the year, the World Bank predicts a downturn in growth for both 2024 and 2025, with growth rates projected at 4.9 percent for each of those years. Indonesia's economy grew by 5.05 percent in 2023.

Fourthly, Iran's attack on Israel could fuel inflation due to rising energy prices. Disruptions in global supply chains might compel manufacturers to source raw materials from alternative locations, ultimately driving up production costs and potentially passing these increases on to consumers.

The Central Statistics Agency (BPS) reported that the monthly inflation rate reached 0.52 percent in March. Year-on-year (YoY) inflation stood at 3.05 percent, with a year-to-date (YTD) inflation rate of 0.93 percent.