Indonesia may see spike in inflation, faster interest rate hikes due to war: analysts

Russia's invasion of Ukraine could not have come at a worse time for Indonesia as South-east Asia's largest economy positions itself for recovery from the Covid-19 pandemic.

Although Indonesia does not have strong trade and investment links with either Ukraine or Russia, analysts say the war will likely push up energy and food prices, as well as fuel a sharp hike in inflation.

This will have a longer term impact on interest rates which could rise faster and much steeper than earlier anticipated.

"The war is not likely to have a significant impact on the Indonesian economy in terms of trade and investment. But if the war is dragged out, it will cause supply chain disruptions, especially for food and energy," said UOB Indonesia economist Enrico Tanuwidjaja.

According to latest figures from ASEANstats, Indonesia's total trade with Russia and Ukraine is less than US$1 billion annually.

Indonesia is also one of the largest importers of wheat from Russia and Ukraine, having imported over US$543 million worth of the cereal grain in 2020.

The conflict could destabilise global food prices affecting dozens of countries across the Middle East, South Asia and North Africa that already suffer from food insecurity and rely on Russia and Ukraine.

If supplies are disrupted, global hunger would increase. According to the United Nations' World Food Programme, Indonesia is home to 26 million people with insufficient food consumption.

Shinta Kamdani, deputy chairman of the Indonesian Chamber of Commerce and Industry for International Relations, told local media that Ukraine and Russia are non-tradtional trading and investment partners for Indonesian businesses.

She noted that Indonesia has tried to conclude a number of trade agreements with Russia in recent years, with no breakthrough as yet.

While the direct impact of the conflict on trade and investment relations may be insignificant, Kamdani added that Indonesia could face supply disruptions - especially for oil and gas - due to the global embargo on Russia.

Indonesia's main exports to Russia include crude palm oil but this is still relatively small compared to other major markets such as China and India.

In terms of imports from Russia, apart from oil and gas, Indonesia is also a purchaser of iron and steel, and defence equipment.

"The main fear for businesses is that the conflict will disrupt Indonesia's plans to carry out further economic cooperation with Russia and Ukraine," Kamdani said.

Market watchers told The Business Times that the initial investor jitters had subsided after they saw how commodity prices and the US market did not fare too badly in the first few days since the invasion began.

"Investors feel that the war may be contained despite the noise," said a Jakarta-based fund manager, who did not wish to be named.

Joining other Asean governments in condemning Russia's actions, Indonesia's foreign ministry said last week that it was "concerned about the escalation of the armed conflict" and condemns any action that clearly constitutes a violation of the territorial integrity an sovereignty of a country.