T

he impact of the political turmoil in the Middle East and the recent earthquake in Japan on Indonesia’s economy is relatively small, analysts claim.

Standard Chartered Bank Indonesia economists said Tuesday the impact of the Japanese earthquake and tsunami was limited because the natural disaster affected only a small portion of trade with the country.

The impact of the political crisis in the Middle East was also limited because of the small exposure of Indonesian exports to the region, they said.

However, a greater challenge would likely come from the Middle East political turmoil because a continued surge in oil prices as a result of the crisis would hurt the Indonesian economy.

“The key is the Middle East crisis. If oil prices surpass US$105 per barrel on an annual average by year-end, Indonesia’s state budget could be affected,” Standard Chartered senior economist Fauzi Ichsan said at a news conference at the Maroush restaurant in Jakarta.

Global oil prices continue to surge amid rising political tension in the Middle East — although oil production is not concentrated in the region — breaking the $100 psychological barrier in February as tensions escalated in the region.

Anti-government protests have taken root in several Middle East and North African countries, namely Saudi Arabia (which accounts for 9.8 percent of the world’s crude oil production), Iran (4.7 percent), Kuwait (2.7 percent) and Algeria (2.1 percent).

In Yemen and Syria, anti-government protests escalated while in Libya and Bahrain revolution is underway, These countries, however, are not top crude oil producers.

“If tensions escalate and global oil prices surpass $105, Indonesia’s growth, inflation and deficit indicators will be affected,” Standard Chartered economist Eric Sugandi said at the same event.

Standard Chartered predicts the West Texas Intermediate (WTI) benchmark oil price would reach an annual average of $105 per barrel by year-end in order to achieve 6.5 percent economic growth and 7 percent inflation rate this year.

The government’s official macroeconomic assumption in the state budget forecasts the country’s economic growth at 6.4 percent, with inflation of 5.3 percent and the benchmark Indonesian Crude Prices (ICP) of $80 per barrel.

When asked about the correlation of the WTI global oil prices benchmark and the country’s ICP benchmark, Fauzi said “there’s no absolute trend: In the past, the ICP was usually lower than the WTI, but recently the ICP is higher”.

The team said the worst scenario was if global oil prices reached $200 per barrel. “Economic growth could slide to 5.5 percent and inflation could soar to 10 percent, with a state budget deficit of 2.5 percent,” Eric said in his presentation.

However, both economists said they believed tensions would not last long enough to reach that point, because several governments were tackling the issue “quite well”.

Addressing the impact of the twin disasters in Japan on Indonesia, Eric said that despite being Indonesia’s largest trading partner, Japan’s massive earthquake and tsunami would have limited impact on Indonesia’s trade activities.

“While Indonesia’s non-oil and gas exports will be harmed in the short-run by slowing demand from Japan, Indonesia’s LNG and oil exports may benefit from increased demand from Japan.”

On the investment side, as the second-largest foreign direct investor in Indonesia in 2010, Japan will still realize its investment commitments in Indonesia — mainly in infrastructure projects — as expressed by the Japanese government.