In recent times, geopolitical tensions in the Middle East have once again taken center stage, with conflicts and threats reverberating across the region. These tensions not only pose immediate risks to stability but also have far-reaching consequences for global markets, particularly in the realm of commodities and capital markets.
One of the most significant sources of tension in the Middle East is the conflict between Iran and Israel. It serves as the trigger for longstanding tensions between the two countries. With US interest in Israel being jeopardized, and Iran’s deepening alliance with Russia and China, the Iran-Israel tension adds a layer of complexity to an already volatile region.
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The potential for escalation looms large, with both sides engaged in a delicate geopolitical dance that could have profound implications for global stability.
The uncertainty surrounding the Iran-Israel conflict has sent ripples through commodity markets, particularly in gold and oil. We have already written about some aspects related to this in our previous sales notes, which you can read here.
Gold, often seen as a safe-haven asset in times of geopolitical turmoil, has seen its prices fluctuate as investors seek refuge from market volatility.
Similarly, oil prices have been affected, with concerns over potential disruptions to production and shipping routes amplifying price volatility.
Central banks, keenly aware of the impact of geopolitical tensions on financial markets, have begun to adjust their strategies accordingly. With the potential for increased market volatility, central banks may opt to bolster their holdings of gold bullion as a hedge against uncertainty. This, in turn, could further drive up gold prices and influence broader market sentiment.
Responding to these conditions, the Indonesian government must swiftly anticipate the worst-case scenarios affecting the national economy.
The surge in oil prices has far-reaching effects, with the exchange rate of the rupiah has plummeted to Rp 16,337 per US dollar, a significant decline compared to before the Eid holiday, which was at Rp 15,874 per US dollar, the weakest position since the COVID-19 pandemic began four years ago.
However, historical precedents suggest that during such turbulent times, currency overshooting is common, and Bank Indonesia typically maintains its presence in both bonds and currency markets, allowing the yield and IDR to find a new equilibrium in an orderly manner.
As the rupiah weakens and oil prices surge, the purchasing power of the public diminishes, posing risks to the state budget. In the 2024 State Budget (APBN), the government has set the exchange rate at Rp 15,000 per US dollar, while the Indonesian Crude Price (ICP) is pegged at USD 82 per barrel. If tensions in the Middle East continue to escalate, energy subsidies are likely to soar.
Our sensitivity analysis suggests that assuming an oil price of USD 100 per barrel and a rupiah rate of Rp 15,900 per USD, the government would need to increase energy subsidies and compensation (for fuel and 3 kg LPG) to reach Rp 100 trillion. Therefore, the government must carefully calculate to prevent the state budget deficit from ballooning.
In light of this development , potential gains are anticipated in the commodity sector, particularly for dollar-earning firms in oil and gold, such as MEDC, MDKA and UNTR.
Currently, we await the actions of central banks, as we anticipate that Bank Indonesia will not lower interest rates in the near future, or even consider delivering a 25-basis-point rate hike, to mitigate potential depreciation of the IDR and imported inflation moving forward.