Indonesia’s stable fiscal image is in danger

Investors, watch out for the country’s next leader.

Fiscal stability is something Indonesia has struggled to achieve since the 1997 Asian Financial crisis, and it is something the country is challenged to maintain in the face of changing leadership.

A report released today by OCBC indicates that sovereign indebtedness in the country is less than half of what is legally allowed, but any rash move by policymakers to hike that up might undo the image of fiscal responsibility that Indonesia has built over the last 15 years.

Fitch and Moody has reassigned an investment grade rating to the country but Standard and Poor’s is still holding back.

The next president is faced with a lot of other major economic issues that include cutting fuel subsidies, sorting out regulatory entanglements in mineral exports and low workforce productivity.

Here’s more:

If Indonesia, with a low sovereign indebtedness as a proportion of its GDP, already faced a tough time dealing with last year‟s market volatility after mere talks of tapering and whiffs of Fed rate hikes, what would happen to an Indonesia, with a markedly higher leverage, during the actual rate hike cycle?

Should bond market come under the combined pressure – of global rising rates environment and loose domestic fiscal stance – the currency would naturally not be spared, as well, especially given the high proportion of foreign ownership of sovereign debts. The resultant volatility in IDR might negate whatever gains that equity investors are hopeful for, even though fiscal largesse typically benefits sectors such as infrastructure and construction.