Indonesia: deficit breach could send bond spreads wider

Concerns that Indonesia’s government will breach it’s 3% of GDP budget deficit rule have only grown after the replacement of respected Finance Minister Sri Mulyani. While the fiscal risk premium in Indonesia’s sovereign dollar bonds appears to have increased, the experience from other emerging economies that have recently broken or suspended their fiscal rules suggests that Indonesia’s bond spreads could widen further, perhaps by another 20-30bp or so.