Prepare for the Worst Case

Following the United States' (US) attack on three Iranian nuclear sites, which President Donald Trump described as very successful, the world is now anxiously awaiting the next developments in the situation in the Middle East. We are also waiting for the reaction of global financial market sentiment as trading in various parts of the world resumes this Monday.

The intervention of the US military in the Israel-Iran conflict increasingly raises concerns about the escalation of the Middle Eastern conflict. Its impact on oil supplies, global shipping routes, and the world economy is also becoming more difficult to predict.

It all depends on Iran's response. As suspected, it is unlikely that Iran will not retaliate. On Sunday (22/6/2025), Iran reportedly fired at least 30 missiles in two waves of attacks on Israel.

Speculation is also increasing that the war will escalate further, involving other major powers such as Russia, China, and other NATO member countries.

The longer the war lasts, the greater the damage it will cause to the global economy. We cannot expect the war to be short-lived.

The Iran-Israel war is not merely a regional conflict involving two countries, but an open war that has the potential to disrupt the global economy and trigger a global recession.

The impacts are immediately felt: soaring energy prices, trade disruptions or disturbances in global supply chains, financial market turmoil, and increasing global geopolitical instability and tensions.

The worst-case scenario, according to analysts, is if Iran completely halts its crude oil supply and blockades the Strait of Hormuz — a transportation route for nearly 30 percent of global oil supply — then crude oil prices are predicted to reach 130 US dollars per barrel.

Far above the assumed crude oil price in the 2025 State Budget of 82 US dollars/barrel.

High oil prices will trigger a surge in production, transportation, and energy costs in various countries, thereby driving global inflation. The pressure of global inflation will cause The Fed to delay interest rate cuts. This will trigger capital outflows from developing countries, including Indonesia, and further put pressure on the value of the rupiah.

For Indonesia, this situation adds further pressure amid the deteriorating prospects of the domestic economy — characterized by a slowdown in domestic economic growth and the worsening of several macroeconomic indicators and other real sectors.

The surge in oil prices will impact Indonesia's fiscal stability as a net oil importer. Every increase of 1 dollar in oil prices results in an increase in state spending by up to Rp 10 trillion, and a widening fiscal deficit of up to Rp 330 trillion. The rising prices of crude oil also inflate the need for energy subsidies.

The government will be compelled to increase its debt again to cover the widening fiscal deficit. It is not impossible that the government will also be forced to further cut the budgets of ministries/agencies, thereby increasingly threatening the prospects for economic growth.

Following Israel's attack on Iran on June 12, the market reacted immediately. In the subsequent trading session, the Dow Jones Index plummeted nearly 2 percent, the S&P 500 was cut by almost 1 percent, and oil prices surged by more than 10 percent within just a few days. The prices of gold and the US dollar also rose sharply, as investors shifted to assets considered safer.

The US attack on Iran and Iran's retaliatory strike on Israel occurred over the weekend while the markets were closed. Previously, the main indices of the US stock market had been trending downward, with investors continuously monitoring the latest developments from the Middle East.

They are also monitoring the signals regarding the direction of interest rate movements in the United States. With the tendency of increasing inflationary pressures, Federal Reserve Governor Christopher Waller stated that the Fed is likely to cut the benchmark interest rate as early as July. The uncertainty surrounding U.S. interest rates is also triggering economic uncertainty globally and putting pressure on developing countries.

Last Friday, the SP 500 closed down for the third consecutive time, decreasing by 0.22 percent to 5,967.84. The Nasdaq Composite fell by 0.51 percent, closing at 19,447.41. The Dow Jones Industrial Average rose by 35.16 points, or 0.08 percent, closing at 42,206.82.

The situation in the Middle East, which is increasingly heating up, seems to be heading towards the worst-case scenario feared by global observers. Indonesia must prepare anticipatory and mitigation measures to face potential shocks ahead by strengthening resilience and bolstering domestic economic defenses.