Indonesia may need $5.9B in energy subsidies amid Iran war

Indonesia is bracing for a sharp rise in energy subsidy costs, with the government estimating it may need to spend up to 100 trillion rupiah ($5.9 billion) more this year as oil prices climb amid tensions involving Iran, according to Reuters.

The warning highlights growing fiscal pressure across emerging markets as energy shocks ripple through public finances.

Algeria, facing similar strains, is preparing for a wider budget deficit next year and has begun curbing domestic demand by capping fuel sales and asking civil servants to work from home.

Funding needs and fiscal pressure

Indonesia expects its subsidy burden to surge if oil prices remain elevated, complicating efforts to keep the fiscal deficit under control.

Officials now see the deficit widening to around 2.9% of gross domestic product in 2026, up from a previously targeted 2.68%.

To absorb the additional costs, the government plans broad spending cuts across ministries, though it has yet to specify which sectors will be affected.

The shift underscores how quickly external shocks can derail fiscal planning in energy-importing economies.

Budget assumptions under strain

Indonesia had already earmarked 381.3 trillion rupiah ($22.5 billion) this year for energy subsidies and compensation to state firms such as Pertamina and PLN, which sell fuel and electricity below market prices.

Those projections were built on relatively stable assumptions, including an Indonesian crude price of about $70 per barrel and an exchange rate near Rp16,500 per US dollar.

But those assumptions are now under pressure.

Oil prices have surged in recent months, at times nearing $100 per barrel, as geopolitical tensions in the Middle East disrupt supply and tighten global markets.

The gap between budget assumptions and market reality is now widening, raising the risk of further fiscal slippage.

Governments move to contain demand

Across the region, policymakers are scrambling to contain the fallout.

Malaysia has introduced caps on subsidised fuel purchases and is encouraging government employees to work from home to limit consumption.

Indonesia is also considering redirecting a significant portion of planned fiscal savings toward cushioning the impact of higher energy costs and potential geopolitical escalation.

At the same time, officials are weighing politically sensitive adjustments to energy pricing as they try to balance fiscal discipline with the need to shield consumers.

For now, the government is betting that oil prices will stabilise. But with global tensions still elevated, that assumption, like its budget projections, is increasingly uncertain.