Indonesia's non-aligned foreign policy, established in 1961, is seen by some as a limitation and by others as an opportunity. The policy was adopted to maintain Indonesia's sovereignty and independence during the Cold War. However, it has limitations in terms of security, economy, and diplomacy. To address these limitations, Indonesia has taken steps to strengthen its military and defense forces, establish economic relationships and partnerships, and participate in international forums. Indonesia's non-aligned stance on diplomatic relations with Israel is consistent with its non-aligned foreign policy [11a60d4b].
The ongoing conflicts in the Middle East, particularly the Gaza war and the Iran-Israel conflict, have the potential to impact Indonesia's economic growth and investment climate. Economist and former Minister of Finance Bambang Brodjonegoro warns that the conflict could cause external disturbances, boost inflation, disrupt public consumption, and affect the prospect of economic growth. The conflict may also exacerbate Indonesia's current account deficit and weaken the trade balance. The disruptions in the Middle East could affect global commodity prices and supply chains, particularly those through the Red Sea and the Strait of Hormuz. The high interest rate and weakening rupiah may weaken global demand for Indonesian exports, especially in the manufacturing sector. Bambang expresses concern about the widening current account deficit, particularly in the service sector. The potential impact on gold and world crude oil prices is also mentioned [74fbfc97].
Further escalation in the Middle East conflict could pose multi-layered economic risks to Indonesia, ranging from further capital outflows to weaker gross domestic product (GDP) growth. Former finance minister Bambang Brodjonegoro said Indonesia’s economic growth this year could end up between 4.6% and 4.8% if further escalation occurred, short of the government’s target of 5.2%. Iran launched over 200 drones and missiles in a military strike on Israel late last Saturday, in retaliation for an Israeli attack on an Iranian consulate building in Damascus on April 1. The conflict between Iran and Israel could pose “serious external challenges” for Indonesia, Bambang said, noting that some four trillion rupiah (US$249mil) of foreign capital left Indonesia’s bond market when the Israel-Hamas conflict began in October of last year. Investors tend to put their money in lower-risk assets such as the US dollar or gold during times of conflict, drawing their funds out of emerging markets such as Indonesia’s, whose assets are riskier. An outflow could further strengthen the greenback against the rupiah. Bank Indonesia (BI) would have to intervene to stabilise the rupiah, Bambang said, but he encouraged caution because exhausting foreign exchange reserves in such an intervention could result in “fatal” consequences. Bambang warned that the escalation could risk increases in oil prices, fuelling global inflation that could corner the US Federal Reserve into keeping its interest rates higher for longer, further weakening the rupiah in the process [28f63a27].
Indonesia is striving to continue economic restructuring to protect the investment climate from impacts of the boiling geopolitical tensions caused by the Iran-Israel conflict. Coordinating Minister for Economic Affairs Airlangga Hartarto stated that restructuring can be conducted by implementing the Job Creation Law, promoting the development of special economic zones, completing national strategic projects, and simplifying investment permits. The minister considers gold and nickel as commodities potentially being targeted by investors in the midst of the souring relations between Iran and Israel. Hartarto further remarked that an unscathed investment climate and well-running economic restructuring are expected to help the country survive global and domestic economic challenges while maintaining national economic growth and completing the development of national strategic projects this year. Earlier, Hartarto ensured that the government had prepared several strategic policies to protect Indonesia's economy from the Iran-Israel conflict. Israel's attack on the Consulate of Iran in Damascus, Syria, on April 1, has led to rising tensions between the two countries. In response, Iran retaliated by launching hundreds of ballistic missiles and drones towards Israel on April 13 [b2cd333d].
Foreign Affairs Minister Retno Marsudi stated that Indonesia has no intention of establishing diplomatic relations with Israel. She expressed concern about the economic repercussions of the ongoing conflicts in the Middle East, particularly the Gaza war and the Iran-Israel conflict. Retno reached out to Iranian Foreign Minister Hossein Amir-Abdollahian and urged all parties to exercise restraint. She emphasized the importance of not overlooking the fate of Palestinians caught in the Hamas-Israel war. The tension between Iran and Israel escalated after Iran launched 300 drones and missiles toward Israel in retaliation against Israel's airstrike on the Iranian consulate in Damascus, Syria. Retno clarified that the news of Indonesia's plan to establish diplomatic relations with Israel was deliberately circulated by certain parties and that Indonesia's position remains highly strategic. The situation in the Middle East is fluid, and the conflicts have the potential to impact the global economy, particularly crude oil prices if there is turmoil in the Strait of Hormuz. Crude oil prices surges would have a significant impact on the economy. Retno Marsudi's statement was made during an interview at her office at the Foreign Affairs Ministry in Central Jakarta on April 18 [11a60d4b].
Indonesia's non-aligned foreign policy provides a framework for navigating the complexities of the Middle East conflicts while maintaining its stance on diplomatic relations with Israel. The country's non-aligned stance allows it to avoid taking sides in the conflicts and focus on its own economic growth and stability. By leveraging its soft power and cultural diversity, Indonesia can enhance its global influence and contribute to peace and stability in the region. However, the ongoing conflicts in the Middle East pose economic risks for Indonesia, including potential disruptions to global commodity prices, supply chains, and trade balance. Indonesia is taking steps to address these risks through economic restructuring, the development of special economic zones, and strategic policies to protect its economy. As the situation in the Middle East remains fluid, Indonesia will continue to monitor and adapt its non-aligned policy to effectively navigate the changing global dynamics and have a real impact on global affairs [e311a0c7].