Indonesia: BI says it will ensure that quantitative easing-era bond sales do not disrupt market

  • Indonesia’s central bank said a plan to sell billions of dollars worth of bonds bought during the pandemic would be conducted carefully, after analysts warned the move could spark debt outflows and complicate an agreement with fiscal authorities.
  • Bank Indonesia (BI) Governor Perry Warjiyo told an investor conference call that BI had sold around IDR1.1tr of bonds early last week and aimed to sell about IDR70tr of bonds with maturities of 5 years and below.
  • He did not provide a time frame. The policy aimed to soak up excess market liquidity, while also pushing bond yields up to make Indonesian assets more attractive amid global monetary tightening, he said.
  • Deputy Governor Dody Budi Waluyo told Reuters the decision should be seen as “a stronger signal” that BI wanted to mitigate inflation and exchange rate risks, even as it held off lifting interest rates from pandemic-era levels – which has made it among the world’s least hawkish central banks.
  • “BI of course will ensure that liquidity in the economy remains adequate to support the economic recovery and we have done a careful calculation,” he said in a phone message, adding the amount of bonds offloaded will depend on market dynamics.
  • BI was holding IDR1,263.27tr of bonds as of 20 Jul 22, up from IDR273.21tr at the end of 2019, after launching quantitative easing to help support the pandemic-hit economy, government data showed.
  • “Increasing bond yields might attract new investors, as the yields will create an attractive entry level, but they might also increase the sell-off from existing investors,” Handy Yunianto, Bank Mandiri’s fixed income analyst, said.
  • Nomura analysts said a big bond sale could be “a double-edged sword” for Indonesia’s debt market, amid weak investment appetite for emerging markets and declining demand from local banks as domestic loan growth picks up.
  • Further complicating the plan, BI still has an outstanding agreement with the finance ministry to buy IDR224tr of bonds that carry low interest rates in 2022.
  • Demand at government bond auctions has been weak in the past few months and, if it falls further, BI may be forced to buy more bonds in 2022 in its capacity as standby buyer, instead of selling, Mandiri’s Yunianto said.
  • Finance Minister Sri Mulyani Indrawati has said Indonesia will try to cut its bond issuance target to navigate the global trend of higher interest rates.
  • Citi’s chief economist for Indonesia, Helmi Arman, expects BI to make three 25 bp-rate hikes starting in Sep 22, and views the bond-selling plan as more symbolic.
  • “Aggressive selling by BI could introduce unnecessary bond supply risk perceptions and thus adversely affect portfolio flows,” he said, predicting BI’s bond holdings would still rise in 2022, but the bond sale plan will reduce the net purchase.

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