Indonesia’s economic prospects are expected to strengthen following the easing of tensions in the Middle East after the United States and Iran reached a peace agreement. Lower global oil prices and improving external conditions could support Indonesia’s economic growth, potentially lifting GDP expansion to as much as 5.4% in 2026.
In its June 2026 edition of the Indonesia Economic Prospects report, the World Bank initially projected Indonesia’s economy to grow by 5.0% in 2026, slightly lower than the 5.11% growth recorded in 2025.
The baseline forecast was based on several assumptions, including an average Brent crude oil price of around US$94 per barrel, relatively tight global monetary conditions, elevated bond yields, and weaker export demand.
According to the World Bank, Indonesia’s economy is expected to remain resilient despite a moderate slowdown, supported primarily by strong domestic demand. The institution also assumes that domestic policy credibility will remain intact, fiscal deficits will stay below the legal ceiling of 3% of GDP, inflation will remain under control, and strategic investment programs, including projects linked to Danantara, will continue to move forward.
However, the World Bank noted that Indonesia’s outlook could improve considerably if external pressures continue to ease. Lower oil prices would help reduce inflationary pressures, decrease energy subsidy expenditures, improve the trade balance, and strengthen investor confidence.
More favorable global financial conditions could also lower borrowing costs and reduce pressure on the rupiah. Under this scenario, Indonesia’s GDP growth could increase by an additional 0.2 to 0.4 percentage points in 2026.
If realized, economic growth could reach between 5.2% and 5.4%, aligning with the Indonesian government’s 2026 growth target outlined in the state budget.
Peace Agreement Supports Global Market Stability
The improved outlook follows recent geopolitical developments in which the United States and Iran reportedly agreed to end a military conflict that had lasted nearly four months. Pakistan’s Prime Minister Shehbaz Sharif, who acted as a mediator, announced that both countries had committed to halting military operations, including activities affecting Lebanon.
One of the most significant outcomes of the agreement was the reopening of the Strait of Hormuz, one of the world’s most critical energy shipping routes. Financial markets responded positively, with Brent crude prices falling to approximately US$81 per barrel by June 16, 2026, significantly lower than the US$114 per barrel reached only weeks earlier.
Potential for Stronger Economic Growth
Indonesia’s Finance Minister, Purbaya Yudhi Sadewa, previously stated that lower global energy prices could substantially reduce the government’s energy subsidy burden. At the same time, the recent adjustment in subsidized fuel prices is expected to have only a limited impact on inflation.
Meanwhile, Bank Indonesia has responded to pressure on the rupiah and inflation risks by raising its benchmark interest rate (BI Rate) to 5.5%, representing a cumulative increase of 75 basis points since May 2026.
Separately, Coordinating Minister for Economic Affairs Airlangga Hartarto projected that average global oil prices could decline to around US$83 per barrel this year as markets react to the US-Iran peace agreement. According to Finance Minister Purbaya, such a decline could create additional fiscal space, allowing the government to allocate more resources toward priority development programs that support economic growth.
Structural Reforms Remain Essential
Beyond external developments, the World Bank emphasized that Indonesia’s long-term growth potential will depend heavily on the successful implementation of structural reforms.
Key growth drivers include the acceleration of newly signed trade agreements, deregulation efforts to reduce business barriers, improved logistics coordination, and credible fiscal reforms. These measures would strengthen investor confidence and increase Indonesia’s productive capacity rather than relying solely on demand-side stimulus.
The World Bank also noted that stronger commodity revenues could provide additional fiscal flexibility for the government. However, the long-term benefits would be maximized if these revenues were used to strengthen fiscal reserves and finance high-impact economic programs.
Outlook for 2027–2028
Under its baseline scenario, the World Bank expects Indonesia’s economy to expand by 5.2% in both 2027 and 2028 as external uncertainties diminish and domestic reforms begin to support investment activity more effectively.
A more favorable environment is expected to encourage stronger private-sector credit growth, stabilize commodity markets, and improve the overall investment climate. These factors could help strengthen export performance and contribute more significantly to national economic growth.
From a sectoral perspective, commodity-based manufacturing, agribusiness, construction, services, and the digital economy are expected to remain key drivers of Indonesia’s economic expansion. Nevertheless, the strength of the recovery will ultimately depend on the pace of reform implementation and the country’s ability to attract greater private investment.
Source: Investor Daily