Indonesia is bracing for significant economic challenges as Coordinating Minister for Economic Affairs, Airlangga Hartarto, has unveiled a series of sobering scenarios regarding the nation’s 2026 state budget (APBN) deficit. This comes amidst escalating conflict in the Middle East, particularly involving Iran, which is driving up crude oil prices and weakening the rupiah. In the gravest scenario, Indonesia’s budget deficit could potentially surge beyond 3 percent.
The 2026 APBN macro assumptions initially set the Indonesia Crude Price (ICP) at USD 70 per barrel and the rupiah exchange rate at IDR 16,500 per US dollar. Airlangga noted that the typical difference between Brent crude and ICP is around USD 3. However, recent geopolitical tensions have drastically altered this outlook. On Thursday, March 12th, Brent crude closed at USD 100.46 per barrel, marking a substantial increase of USD 8.48 or 9.2 percent. This sharp rise was attributed to Iran’s retaliatory actions, which included attacks on oil and transportation facilities across the Middle East and a blockade of the Strait of Hormuz.
In response to these volatile conditions, the government has prepared three distinct scenarios based on the presumed duration of the Middle East conflict: 5 months, 6 months, and 10 months. According to Airlangga, speaking during a plenary cabinet meeting on Friday, March 13th, the average crude oil price in the 5-month scenario is projected to reach USD 90 per barrel. For a 6-month conflict, the average price could hit USD 97 per barrel, with Brent potentially touching USD 107 per barrel. The most extended 10-month scenario projects an average ICP of USD 115 per barrel, with Brent possibly soaring to USD 130 per barrel before moderating to USD 125 per barrel by the end of December. These projections stand in stark contrast to the actual ICP observed from January to February 2026, which averaged USD 64.41 and USD 68.79 per barrel, respectively, remaining below the assumed USD 70 per barrel.
These rising oil prices and rupiah depreciation directly impact the APBN. Under the first moderate scenario, where ICP reaches USD 86 per barrel and the rupiah weakens to IDR 17,000 per US dollar, with an economic growth target of 5.3 percent and State Securities (SBN) yield at 6.8 percent, the budget deficit could widen to 3.18 percent. Moving to a second, more challenging moderate scenario, if ICP hits USD 97 per barrel and the rupiah reaches IDR 17,300 per US dollar, with a predicted economic growth of 5.2 percent and SBN yield of 7.2 percent, the deficit is projected to climb to 3.53 percent.
The most pessimistic scenario paints an even more concerning picture. If ICP surges to USD 115 per barrel, the rupiah depreciates to IDR 17,500 per US dollar, with growth at 5.2 percent and SBN yield at 7.2 percent, the budget deficit could an alarming 4.06 percent. Airlangga issued a stark warning that maintaining the current 3 percent deficit target would be exceedingly difficult under these circumstances, “unless we are willing to cut government spending and trim our growth targets.”
Providing historical context, Airlangga highlighted that significant crude oil price increases have often coincided with periods of global crisis. Over the past 25 years, oil prices reached their peak at USD 139 per barrel in June 2008 during the US subprime mortgage crisis. Subsequently, in 2011, prices breached USD 125 per barrel during the Arab Spring conflicts. More recently, the Russia-Ukraine war saw prices briefly touch USD 110 per barrel before falling to USD 78 per barrel by September 2022. Interestingly, Airlangga noted that the United States’ reserves are currently secure, and strategic petroleum reserves from various nations have not yet been utilized, suggesting there may be further upward pressure on prices should global supply tighten.