Jakarta. Indonesia is bracing for heightened economic risks as the escalating conflict between Iran and Israel drives global oil prices higher and adds pressure on the state budget. Finance Minister Sri Mulyani Indrawati warned Tuesday that the price surge, combined with broader geopolitical and fiscal uncertainty, poses a serious challenge to Indonesia’s economic stability.

“On the third day of the Iran-Israel war, oil prices have risen by more than 8 percent,” Sri Mulyani said during the APBN KiTa press conference at the Finance Ministry in Jakarta. She noted that the sudden jump to over $78 per barrel may strain domestic inflation and state finances.

Data show that global oil markets remain volatile. Brent crude futures settled up $3.22, or 4.4 percent, at $76.45 a barrel on Wednesday, while US West Texas Intermediate (WTI) crude rose $3.07, or 4.28 percent, to $74.84 per barrel. The spike occurred despite no major damage so far to Iran’s key energy infrastructure or oil and gas flows.

Still, Iran was forced to halt partial gas production at its South Pars field, jointly operated with Qatar, after an Israeli strike caused a fire. Israel also reportedly targeted Iran’s Shahran oil depot, raising fears that the conflict could escalate further and disrupt global energy supply chains.

“This conflict doesn’t just impact commodity prices. It also puts pressure on exchange rates, interest rates, and capital flows,” said Sri Mulyani. “The dangerous combination of rising prices and weakening global growth needs to be closely watched.”

Aside from the Middle East tensions, she pointed to continued trade uncertainty between the United States and China. Although both powers have resumed dialogue, no substantial progress has been made. Compounding the risks is the U.S.'s aggressive fiscal expansion plan, dubbed “big and beautiful” by President Donald Trump, which could push America’s budget deficit beyond $10 trillion over the next decade.

Sri Mulyani warned that such developments could drive up global interest rates and create ripple effects for emerging markets like Indonesia. “This is a dangerous mix: inflation and economic slowdown occurring simultaneously,” she said.

Despite external headwinds, she emphasized that Indonesia’s domestic economy remains resilient through May 2025. Inflation stood at a manageable 1.6 percent, helped by strong food supply and harvest-driven deflation in key commodities like rice and corn. Domestic consumption and infrastructure investment also showed positive trends, with electricity use in the business sector up 4.5 percent and building investment rising nearly 30 percent in April.

Retail sales expanded 2.6 percent year-on-year, although the manufacturing sector showed weakness, with the Purchasing Managers’ Index (PMI) falling to 47.4, indicating contraction.

“APBN continues to work hard to mitigate these evolving global challenges,” Sri Mulyani said, reaffirming the government’s commitment to maintaining a credible and adaptive fiscal policy.

Meanwhile, state-owned energy giant Pertamina is on high alert. The company is closely monitoring the conflict’s impact on global oil shipping lanes, particularly those used by its subsidiary, Pertamina International Shipping (PIS).

“Given the conflict in the Middle East, Pertamina has increased its vigilance and is conducting regular monitoring, especially for tankers supplying crude oil to Indonesia,” said Fadjar Djoko Santoso, Pertamina’s Vice President of Corporate Communication.

While Pertamina’s operations remain unaffected for now, the company has prepared contingency plans, including alternative shipping routes, in the event of a further escalation.

“We’ve mapped out backup routes to ensure oil supplies from the Middle East remain uninterrupted,” Fadjar said.

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