- Over the past week, the Rupiah fell while capital flowed out of Indonesian assets, with some of the decline plausibly driven by “flight to safety” amid an escalation of the Middle Eastern conflict.
- However, even without further escalation, there are good reasons for the USD and oil prices to remain elevated in the near-term, given the run of solid US macro data and an ongoing net inventory drawdown in the global oil market.
- Since USD and oil are now positively correlated, the government may incur large fiscal costs to maintain current fuel prices, although the present USD/oil levels do not yet warrant immediate price hikes.
- The situation could have substantial silver linings for Indonesia, in the form of potentially higher commodity prices and a rebound in GDP deflator, which could finally curtail the “inverse money illusion” of recent quarters.
