EMERGING MARKETS-Indonesia stocks tumble, rupiah nears 17,000 on budget deficit worries

By Sameer Manekar

March 16 (Reuters) - Indonesian stocks slid to an eight-month low on Monday, while the rupiah neared the 17,000-per-dollar mark, as investors feared that the net oil importer could breach its budget deficit limit due to the Middle East war.

President Prabowo Subianto, in an interview with Bloomberg News on Sunday, said he would approve a short-term increase in the budget deficit beyond the 3% legal ceiling if oil prices stayed elevated for a sustained period.

Investors worry that such a move could open the door to broader, less predictable spending, threatening Indonesia's hard-won fiscal discipline.

"The bigger danger is not only a wider deficit, but the signal that the fiscal rule is becoming negotiable," Josua Pardede, chief economist at Permata Bank, said.

"Once that signal is sent, it can weaken the rupiah, raise borrowing costs, and make every future policy promise harder to finance."

Pardede does not expect the president to "rush immediately to formally lift the ceiling for the short term," but said that the "probability of a breach has risen materially if oil remains elevated for months and the rupiah stays under pressure."

Jakarta stocks .JKSE fell 1.5%, heading for their lowest closing level since July 2025, while the rupiah IDR= slipped to a record low of 16,995 per dollar, just shy of the key 17,000 psychological level.

Since the start of the war, the yield on Indonesia's 10-year government bonds has jumped more than 40 basis points to 6.819%, the highest since late June last year.

Foreign investors have pulled 13.18 trillion rupiah ($775.75 million) from government bonds this month, according to data compiled by Maybank global market economist Myrdal Gunarto.

Elsewhere in emerging Asia, stocks fluctuated as investors remained on edge over the escalating tensions in the Middle East, despite hopes that a coalition to escort ships through the Strait of Hormuz would ease supply pressure.

A surge in oil prices since the start of the war has rippled through financial markets, triggering heavy equity outflows and complicating the inflation outlook for most central banks, likely halting their easing cycles. TOP/CEN

Bank Indonesia is expected to keep its interest rate steady in a meeting on Tuesday, a Reuters poll showed.

Among regional equities, stocks in Seoul .KS11 closed up 1.1% after falling as much as 0.7% earlier. Taiwan's benchmark gauge .TWII slipped marginally after trading in a tight range.

Taiwan's dollar TWD=TP hovered near 32 a dollar, its weakest level since early May last year.

Shares in Singapore .STI and Malaysia .KLSE edged higher, while those in Thailand .SETI were flat.

Equities in the Philippines .PSI slipped about 1%, while the peso PHP= briefly touched 60 per dollar before recovering to around 59.857.

HIGHLIGHTS:
Yield on Indonesia's 10-year benchmark index ID10YT=RR flat at 6.819%
Vietnam braces for flight cuts from April after China, Thailand ban jet fuel exports
China's economy builds early momentum in 2026 as risks mount

($1 = 16,990.0000 rupiah)