Indonesia’s central bank agreed to buy billions of dollars of sovereign bonds directly from the government to help it finance the fiscal response to the coronavirus pandemic.
Bank Indonesia will purchase 397.56tn ($27bn) of bonds directly from the government at the benchmark seven-day reverse repurchase rate, Finance Minister Sri Mulyani Indrawati said in an online briefing to reporters yesterday.
The government will issue another 123.46tn rupiah of bonds to support micro-, small and medium enterprises, with part of the interest cost borne by the central bank, she said.
The government has been pushing the central bank to share more of the burden of financing the extra spending that’s going toward containing the fallout of the Covid-19 pandemic.
President Joko Widodo is seeking to borrow about $115bn this year to repay its debts and fund a budget deficit estimated at 6.34% of gross domestic product.
“From monetary and fiscal sides, together we are trying to recover Indonesia’s economic policy in a sustainable way,” Indrawati said. “The government is committed to maintaining fiscal discipline, to bringing down the budget deficit gradually to below 3% and to adhere to fiscal discipline in 2023 and beyond.”
Earlier proposals for Bank Indonesia to purchase the bulk of the bonds at zero interest had weighed on the currency and credit-default swaps as investors worried about risks to inflation and the possibility of a credit rating downgrade.
Governor Perry Warjiyo said yesterday at the briefing that inflation is under control and it’s assessing price and growth dynamics regularly.
“We see so far that demand is not yet strong and inflation is low,” he said. “However, if inflation recovers and the economy picks up, Bank Indonesia has the tools ready, we have the policies.”
The agreement worked out between the Finance Ministry and central bank allows the bonds to be tradable and marketable, the finance minister said, meaning Bank Indonesia can use the securities for monetary operations.
Bank Indonesia already had been taking a more aggressive role in providing stimulus to the economy, buying sovereign notes directly from the government at primary market auctions since April.
Under the latest agreement, Indrawati said the government will double the size of its auction, held every two weeks, to 40tn rupiah.
Not Unique Indrawati said the “burden-sharing scheme” isn’t new and not unique to Indonesia, citing countries like Japan and the US that have carried out similar programmes.
Central banks in developing countries like Turkey and the Philippines are also taking on a bigger role as a buyer of government debt, she said.
“With the burden-sharing, the central bank and the government are demonstrating a solid coordination in giving stimulus to the economy to accelerate the recovery,” said Josua Pardede, an economist at PT Bank Permata in Jakarta. “And this should provide positive sentiment because if the recovery is materialised then it will of course maintain the stabilization in the financial market.”
Here’s a breakdown of the debt monetisation plan and other highlights from the briefing: The government’s additional debt financing requirement is estimated at 903.46tn, with the central bank sharing the burden of financing 574.4tn rupiah, or 64%, of that and the government fully funding 329tn rupiah. The central bank will fund the following through bond purchases: 397.56tn at the seven-day reverse repurchase rate (currently set at 4.25%) for spending on public services, such as health care, social safety nets and food security; 123.46tn rupiah for micro-, small and medium enterprises; 53.37tn rupiah for non-MSMEs Bank Indonesia will cover part of the interest cost on the bonds sold to help MSMEs and non-MSMEs – specifically it will cover the difference between the market rate and 1% below the central bank’s 3-month reverse repo rate. The government sees a rebound in economic growth from the third quarter as it accelerates spending Bank Indonesia and the government to ensure market integrity and a fair yield Warjiyo sees scope for the rupiah to appreciate and bond yields to drop as budget financing agreement provides more certainty to the market. Bond purchases to finance the cost of public services is a one-offpolicy, Warjiyo says.
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