Indonesia unveils USD40bn bond scheme to fund recovery from pandemic

  • Indonesia’s central bank has agreed to buy IDR574.59tr (USD40bn) of government bonds in 2020 and rebate most of the yield to help fund the economic recovery, Finance Minister Sri Mulyani Indrawati said on 6 Jul 20.
  • The bond-buying programme will help finance the 2020 fiscal deficit, which is forecast to reach 6.34% of GDP in 2020, as the government steps up spending to fight the virus outbreak while revenue drops.
  • Some IDR397.56tr of bonds will finance public interest programmes and the cost will be fully borne by the central bank, Indrawati said. The rest will carry interest rates below the central bank’s 3-month reverse repurchase rate and will support recovery schemes for some businesses, she said.
  • The bond scheme for public interest programmes is a one-off policy, the debt will have long maturities and be tradeable, which will allow Bank Indonesia (BI) to utilise them for its monetary operation, she added.
  • BI Governor Perry Warjiyo said the scheme will have a small impact in 2020 on inflation, which hit a 20-year low in Jun 20 due to weak demand, while BI will continue to assess the impact on future inflation and rupiah exchange rate.
  • Warjiyo added that the scheme will not have any implication to monetary policy.
  • BI has intensified its “quantitative easing” operations in recent months to help cushion the economic slowdown and cut its main policy rate three times in 2020 to support GDP, on top of four cuts in 2019.
  • Warjiyo at BI’s last policy review had flagged the potential for more cuts.
  • The government expects Indonesia’s GDP to come in between a 0.1% contraction and a 1% expansion in 2020, compared with 5% growth in 2019.
  • The deal implied some bond supply risk as BI is unlikely to unload the bonds in the market in 2021 or 2020, an analyst said.
  • “In our view, a pre-condition for unwinding would be if portfolio inflows are large enough relative to both the balance of payments and the fiscal year’s financing needs, such that any potential yield volatility could be managed,” Citi said in a note.

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