JAKARTA- Indonesia has to stick to plans to reduce its fiscal deficit, given the risk of tighter liquidity if the Federal Reserve raise interest rates more aggressively to counter US inflation, the finance minister said on Tuesday.
In an interview with Channel News Asia, Sri MulyaniIndrawati said the government had anticipated US rate hikes and had been managing the economy and the state budget based on the expected implications.
The strategy includes ensuring a commodity-related windfall of revenue was used to reduce the fiscal deficit, she said, noting how the country is expected to book additional revenue amounting to nearly 3 percent of gross domestic product this year.
“We have to make sure that this additional fiscal space will be reserved for us to first declining the deficit so that we don’t have to be in a position of seeking financing sources when the market is so volatile,” she said.
Based on the past 40 years, US interest rate hikes will be followed by tighter liquidity, rising global rates, and a strong US dollar, all of which have to be considered when managing Indonesia’s economy and budget, she said.
Indonesian financial markets have been under pressure this week after Friday’s news of a higher-than-expected US inflation rate and bets that the Fed will raise interest rates by 75 basis points on Wednesday.
The rupiah has fallen more than 1 percent and bond yields have risen this week.
