BI wants to scrap SBI papers
The Jakarta Post
Deeming them no longer an effective tool to control the nation’s money supply, Bank Indonesia (BI) says it will completely scrap its debt papers to help it meet monetary targets.
BI Governor Darmin Nasution said on Tuesday that the central bank would replace Bank Indonesia certificates (SBI) with government debt papers to better manage the money supply within the levels set by the central bank, especially for inflation.
SBIs are short-term promissory notes issued by the central bank as part of “open-market operations”.
Bank Indonesia has significantly reduced the issuance of SBIs because banks have started using them as investment tools to reap profits.
Many banks have chosen to place their money in SBI debt papers rather than extending loans to the industrial sector, which carries a higher risk. This has contributed to the ineffectiveness of SBIs as a tool to control the money supply.
“The removal of SBIs can’t be viewed in the short term, but it might [happen] sooner if there is an agreement on asset and liability management with the government,” Darmin told The Jakarta Post in an interview.
“It can’t be done within a year. It takes time. We will do it gradually, especially if asset and liability management can be concluded and agreed upon with the Finance Ministry.”
BI spokesman Difi Johansyah defined “asset and liability management” as the conversion of the recapitalization bonds (recap bonds) from non-tradable to tradable bonds.
Following the 1997/1998 Asian financial crisis, Indonesian banks received hundreds of trillions of rupiah in liquidity support from the central bank in government bonds to keep their businesses alive by taking out returns from the debt papers.
“The principle is that instead of creating SBIs to be sold to banks, it’s better that we repurchase government bonds from banks. The problem is that BI previously did not have a sufficient supply of government bonds,” Difi said.
“Asset and liability management will boost supply for BI for monetary operations, so the government bonds must be tradable.”
Finance Ministry debt management chief Rahmat Waluyanto confirmed that the outstanding value of the recap bonds, which totaled about Rp 240 trillion (US$26.4 billion) at the end of December, would be converted to tradable bonds so that the central bank could use them as instruments for monetary operations.
“If the government and BI agree, the results of the discussion will be submitted to the House of Representatives to secure approval,” he told the Post.
Rahmat previously said he expected an agreement to be reached in 2012 and that the conversion would be done gradually to avoid negative impacts on the stability of the government bond market.
Separately, Bank Danamon chief economist Anton Gunawan said the use of government bonds for monetary operations would reduce the costs of SBIs to the central bank for market operations to meet its monetary targets.
“If SBIs are completely scrapped and replaced by government bonds, bank liquidity management would be affected, so banks would need to be more careful because the risks of government bonds are higher than SBIs,” he said.
“Foreign investors would be kicked out. BI doesn’t want its instruments to be used for foreign investors because they are more greatly connected to rupiah fluctuations.”
Anton cited term deposits and BI deposit facilities (FasBI) as alternatives for banks, saying that the former was “more constraining” and the latter as gave less returns.
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