Indonesia’s National Economic Council warned on Wednesday that foreign investors could pull significant capital from the domestic market if the government fails to maintain fiscal discipline, as higher yields in developed economies raise competition for sovereign debt.
Foreign capital vulnerability
Heriyanto Irawan, Member of the National Economic Council, pointed out that foreign investors hold $88 billion in Indonesian securities, which equals 1,544.6 trillion rupiah at an assumed exchange rate of 17,552 rupiah per dollar.
“If even 10% of that US$ 88 billion flows out, the impact on us will be quite significant,” Irawan said in Jakarta at an HHP Law Firm event titled ‘Mobilizing Capital and Strategic Certainty for Indonesia’s Next Growth Phase’.
Capital flight risks loom.
External yields and domestic deficits
Yields above 3 percent in developed nations such as the United States and Japan increase the attractiveness of those assets, which heightens capital outflow risks for Indonesia while China also competes in the global market.
“One of the important pillars for us to convince foreign investors is the credibility of how we manage our fiscal policy,” Irawan said, emphasizing that the government projects a fiscal deficit of 2.5 percent for next year.
“This reminds all of us that we must be very disciplined in managing fiscal policy,” he said, adding that policymakers must stay careful about external spillover impacts on Indonesia.
Labor market pressures
The domestic economy faces demographic headwinds as Indonesia prepares for ongoing labor force additions across a timeframe of 10-15 years.
Youth unemployment stands at 16 percent.
Youth joblessness accounts for 49 percent of total unemployment across the country, presenting long-term structural obligations that domestic fiscal planners must account for alongside foreign bondholder exposure.
“This is a reality that we must know, must understand, and must plan ahead for solutions,” Irawan said.
Source: Indonesia's National Economic Council
