Oil Price Shocks and Fiscal Resilience: The Role of Sovereign Bonds in Mitigating Budget Deficits

Abstract

This study examines the impact of sovereign bonds on Indonesia’s budget deficit, with global crude oil prices acting as a moderating variable, to understand fiscal resilience during periods of oil price volatility. The novelty of this study lies in the integration of sovereign bond financing and oil price shocks within a moderating framework, providing a more comprehensive explanation of budget deficit dynamics in an oil-importing emerging economy. Using Moderating Regression Analysis (MRA), quarterly data from 2010–2025 were analyzed. The results indicate that sovereign bonds have a positive and significant effect on the budget deficit (? = 1.384; p < 0.001), while crude oil prices alone do not significantly affect the deficit (? = 1.124; p = 0.580). However, the interaction between sovereign bonds and crude oil prices is statistically significant (? = -1.111; p = 0.012), confirming the moderating role of oil prices. The overall model is significant (F = 15.836; p < 0.001) and explains 79.4% of the variation in Indonesia’s budget deficit (R² = 0.794). These findings suggest that sovereign bonds are an important fiscal instrument for managing budget deficits, while fluctuations in crude oil prices significantly influence their effectiveness. The study contributes to the literature by providing empirical evidence on the interaction between sovereign debt instruments and external energy shocks in shaping fiscal resilience and sustainable debt management.