Indonesia: Central Bank Buys USD1.6bn in Gov’t Bonds and Set to Buy More

  • Indonesia’s central bank has bought USD1.6bn worth of government bonds in the primary market, underlining its commitment to remain active in it as the country faces a burgeoning state budget deficit due to the rising cost of Covid-19 mitigation efforts.
  • Finance Minister Sri Mulyani Indrawati on 18 May 20 said the deficit might reach up to IDR1,028.5tr (USD69bn) in 2020, or 6.27% of the country’s gross domestic product (GDP) – the biggest in at least three decades.
  • Tax revenue is also expected to shrink as the government cuts corporate income taxes.
  • To counter the expanding deficit, Bank Indonesia (BI) Governor Perry Warjiyo said the central bank will buy more government bonds.
  • “We will help the government meet its fiscal financing obligations in the primary market – we won’t leave it to the market,” Perry said in a teleconference on 19 May 20.
  • BI had signed an agreement with the Finance Ministry to buy the government bonds and until 14 May 20 it had already bought IDR22.8tr worth of the bonds from the primary market.
  • The central bank is buying the bonds straight from the government through non-competitive bidding. BI is allowed to buy up to 25% of the issuance target.
  • Perry has also encouraged banks in need of more liquidity to trade their bond holdings to the central bank in a repurchase agreement (repo).
  • According to BI’s data, Indonesian banks’ total bond holdings were valued at IDR886tr as of 14 May 20. The central bank’s secondary reserve policy mandates a macroprudential liquidity buffer (PLM) of 6% of third-party funds.
  • “Therefore, out of the IDR886tr, IDR330.2tr provides liquidity for the banks. The remaining IDR563.6tn can be repo-ed to BI,” Perry said.

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