- The Middle East conflict poses dual risks: higher costs and supply delays.
- We see two channels of impact, via financial markets and spillover on the economic variables.
- Adjustments to administered prices will prove to be inflationary.
- Rate hikes would require either sharp currency depreciation or a fuel price increase.
Related insights
Click here to read the full report
Summary
Tough geopolitical terrain
Heightened instability in key energy-producing countries in the Middle East and disruptions to critical maritime routes, particularly Strait of Hormuz, have generated significant economic spillovers across Asia, primarily through higher energy prices, financial market volatility, rising trade costs, and disrupted supply chains. Unlike previous oil and energy shocks that mainly affected prices, this time the issue involves both rising costs and reduced supply, which together intensify the overall impact.
Channels of impact
There are two channels of impact for Indonesia – risk sentiments and economic spillover, with the intensity of fallout to be guided by the duration of the conflict and extent of resultant supply shocks.
Energy mix
From the domestic point of view, coal & products (36% share) dominate the sources of energy, followed by oil (26%) and natural gas (at 15.6%). By contrast, the domestic energy production mix is led by coal at a significant 72%, underscoring the ability of the country to not only meet local coal needs but also turn into a net exporter. The next two charts highlight the domestic energy production-consumption composition. Primary oil and natural gas production while significant falls short of the energy needs, necessitating imports (oil importer, gas exporter).
Economic impact
Indonesia is a net energy exporter, with the energy balance led by coal and gas, insulating the economy to some extent from the current turmoil, compared to regional peers. Nonetheless, dependency on supplies from the Middle East is non-trivial.
Global crude benchmark prices have jumped sharply in Mar26, averaging $98/bl vs Jan-Feb26 average at $68.70/bl. The Indonesia crude basket is also expected to catch-up when more recent numbers are made available, taking it back to 2022 levels.
External risks return focus to fiscal math
The Middle East energy crisis compounds existing concerns over the fiscal outlook. The January-February budget recorded a modest deficit at the start of the year marking a departure from the customary surplus typically seen during the same period. Government spending jumped 41% yoy in Jan-Feb26, on higher revenue, capital and social assistance disbursements. To deal with the crisis, the authorities are likely to explore one of the three alternatives.
Market implications
In all, bond markets are looking at an environment of higher risk premium as rate cuts are removed from the curve and the likelihood of additional bond issuance increase in the face of fiscal risks. The view of rating agencies after the outlook downgrade is also in view. BI is likely to provide stiff resistance to rupiah depreciation, with a stagflationary shock expected to keep them from raising rates in a hurry.
Click here to read the full report
Topic
Explore more
E & S FlashGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates & Digital Assets)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.
Related insights
Related insights
- Member of Central Deposit Insurance Corporation (CDIC)