Strait of Hormuz Reopening and the Rupiah: Testing the Recovery's Foundation

Rupiah Stability Watch · 2026-07-06

The Premise

On 26 June 2026, the UN's International Maritime Organization suspended plans to evacuate more than 11,000 sailors from the Strait of Hormuz. A cargo ship had been attacked. The evacuation was paused, not cancelled. At the same time, Brent crude has settled in the low-$70s — down from the $93 peak that sent Indonesia's fiscal planners scrambling in May 2026.

Our June publications documented how oil's collapse gave Indonesia critical breathing room and drove a 1.8% rupiah rebound to around 17,729 per US dollar. The BI rate was hiked in two emergency moves — first to 5.50%, then to 5.75% — as Bank Indonesia prioritized currency defence. Now, with the Strait nominally reopening, the question is whether the recovery narrative holds. The answer is: partially, and on shaky foundations.

What the Evidence Supports

1. The Oil-Rupiah Channel Is Still Active

Brent crude is currently trading around $70-76 per barrel, down from a wartime spike to $93 and the mid-$80s where it lingered through late June. This is a material improvement for Indonesia, which imports roughly 45% of its oil needs and sets its budget on an oil price assumption of $70 per barrel and a rupiah assumption of Rp 15,300 to the dollar.

The Energy Information Administration (EIA) has significantly downgraded its oil demand outlook, now forecasting a global demand decline of 1.1 million barrels per day in 2026 — a stark reversal from earlier growth projections. This suggests the demand destruction from the crisis is persistent, even if supply normalizes.

For Indonesia, lower crude prices translate into:

2. The Rupiah Has Stabilised — But Not Meaningfully Strengthened

The rupiah traded at approximately 17,842 per US dollar on 26 June 2026, down slightly from the prior session. Over the past month, it has strengthened by about 0.06% — effectively flat. Over the past year, it remains down nearly 10%.

Bank Indonesia, having raised its benchmark rate to 5.75% from 5.00% in two emergency hikes, has signalled continued priorit-objects policy trajectory, with further tightening considered possible if global conditions deteriorate.

The central bank's stated priority is clear: stabilise the rupiah's exchange rate. With BI holding at 5.75%, the real test will be whether oil's decline frees BI to pause its hiking cycle — or whether the next global shock forces further tightening.

3. The Strait's Reopening Is Fragile, Not Decisive

Shipping through the Strait remains severely constrained. As of early July 2026, only about one-third of normal commercial traffic has resumed. War-risk insurance premiums, which surged from 0.25% to 1-3% of hull value — and as high as 4,000 times pre-crisis rates for some categories — remain elevated.

The pause in UN evacuations after the 25 June cargo-ship attack illustrates the core risk: the US-Iran peace framework exists on paper, but implementation is uneven. Maritime insurers have not materially repriced risk downward. The toll dispute between regional actors remains unresolved. And the June 25 attack on the Singapore-flagged Ever Lovely served as a reminder that vessels outside designated framework routes remain vulnerable.

For Indonesia, this means import costs are not falling as quickly as crude prices would suggest. Indonesian fuel imports — dominated by Pertamina through Middle Eastern supply lines — face elevated shipping costs and congestion at alternative ports even if crude itself is cheaper.

4. Fiscal Space Is Recovering — But From a Stressed Baseline

Indonesia's 2026 state budget was drafted on assumptions that have not held. With ICP (Indonesia Crude Price) floating in the low-$70s instead of the $82 assumption, the subsidy math improves meaningfully. Every $10 decline in average oil price saves the Indonesian government an estimated $2-3 billion in fuel subsidy costs.

However, the improved fiscal picture is offset by:

Finance Minister Sri Mulyani has previously indicated the government would use budget surplus (SAL) funds to manage debt issuance. The current lower-oil-price environment gives the government more room to avoid emergency borrowing or subsidy cuts — but it does not restore the pre-crisis fiscal cushion.

What the Evidence Does Not Support

A "Trend Reversal" Is Not Yet Confirmed

The rupiah's 1.8% rally to 17,729 was real but has since given back ground. The current level of ~17,800-17,850 is marginally weaker than the June rally peak. The calendar-year depreciation of nearly 10% means "recovery" is relative to crisis lows, not a restoration of stability.

Lower Oil Prices Guarantee Subsidy Relief

While the subsidy burden is lower, the political commitment to maintaining subsidised fuel prices remains absolute. The Pertamax hike triggered protests in Jakarta on 12 June 2026, and the government has shown no appetite for further fuel-price increases ahead of a politically sensitive period. Lower crude prices may thus translate into larger quasi-fiscal deficits (Pertamina losses absorbed by the state) rather than visible budget savings.

The Strait Reopening Means Shipping Normalisation

Even if the Strait were fully cleared and insured, the global tanker fleet has been rerouted for months. Congestion at alternative loading ports (East African, Southeast Asian) and the backlog of deferred maintenance and refinery adjustments will keep shipping costs elevated through at least Q3 2026.

Countervailing Risks

El Niño and Agricultural Production

Multiple agencies, including the FAO, have warned that Indonesia faces elevated drought and fire risk through late 2026 and early 2027 due to a strong El Niño pattern. Palm oil production — a critical export earner and foreign-exchange generator — could decline by up to 2 million tonnes in 2026. Drought also threatens rice and maize yields, increasing rural food insecurity and potentially requiring emergency food imports.

Lower palm oil exports would worsen the current account at the same time lower oil prices are improving it — partially offsetting the rupiah's stabilisation.

Demand Destruction Outpacing Supply Recovery

The EIA's forecast of 1.1 million b/d demand decline in 2026 is a structural signal. If global recessionary forces deepen, Indonesia's key export markets (China, US, ASEAN) may import less Indonesian goods and commodities, undermining the trade balance that lower oil prices have improved.

Inflation Persistence

June CPI at 3.34% is above the midpoint of BI's 2.5%±1% target. If the Pertamax price hike feeds into broader administered-price inflation (transportation, logistics, electricity), BI may be forced to tighten further even if oil stays cheap — a perverse outcome where cheap crude coexists with tighter monetary policy.

The Least-Harm Path

For Indonesia's policymakers, the current environment offers three operational priorities:

  1. Lock in fiscal savings from lower oil prices. Direct the subsidy savings toward productive investment (infrastructure, electrification, agriculture) rather than allowing them to be absorbed by political commitments or consumed as current expenditure.

  2. Build foreign-exchange buffers while they are available. Lower oil prices and at least partial Strait reopening give BI a window to rebuild reserves. This window may close quickly if another maritime incident reverses shipping confidence.

  3. Accelerate El Niño preparation. The drought risk is known and material. Early intervention (irrigation, alternative crops, palm oil replanting support) is lower-cost than emergency food imports after the fact.

What I'm Uncertain About