Does sovereign sukuk offer an Islamic remedy for fiscal fragility? : a Minsky reflection on systemic instability in Indonesia

Abstract

This study analyzes the relationship between fiscal dominance, sovereign financing instruments, and systemic financial instability in Indonesia through Minskyan and Islamic fiscal perspectives, motivated by the growing role of sovereign sukuk (SBSN) and conventional bonds (SUN). A Systemic Instability Index (SII) is constructed using Principal Component Analysis (PCA) on macro-financial variables: inflation, the sukuk-bond yield spread, Non-Performing Financing (NPF), and the Financing-to-Deposit Ratio (FDR). Quarterly data from 2008Q1 to 2025Q2 are used, with annual series interpolated via the Denton method. The relationship is estimated using an Autoregressive Distributed Lag (ARDL) model, with Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) as robustness checks. The results confirm a long-run relationship between fiscal variables and systemic instability. Fiscal deficits, GDP growth, and COVID-19 shocks are positively and significantly associated with instability, while government debt shows a negative relationship, indicating that sovereign debt predominantly served as a financing and stabilising tool. Sovereign sukuk and conventional government bonds display comparable macro-financial characteristics, with negative coefficients and limited empirical differences. These findings suggest that fiscal pressure, debt financing, leverage build-up, and refinancing dependence are more strongly linked to systemic instability than the formal Islamic-conventional categorization of instruments. The study proposes the Islamic Minsky Stabilization Model (IMSM), an anti-fragility framework combining Minsky's Financial Instability Hypothesis with Islamic fiscal principles. It emphasizes prudent fiscal management, genuine asset-backed financing, risk-sharing, productive-sector linkages, and reduced refinancing reliance to strengthen long-term macro-financial resilience. The study contributes by explaining the sustained stability of both instruments and offering a conceptual framework for mitigating leverage-driven fragility in sovereign financing systems.