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earning from the financial-market turbulence in mid-2013 as a result of the fallout from the prospect of an imminent tapering policy by the United States Federal Reserve later in that year, the 2016 state budget bill stipulates special provisions for coping with an emergency situation, taking into account the uncertainty about the global economic situation and potential upcoming US monetary tightening.

Similar to the 2014 State Budget Law, the draft budget legislation for 2016 also stipulates that in case of a crisis in the government bond market set off by a sudden reverse in capital flows or steep deviations in the assumptions for key macroeconomic indicators, the government (finance minister) can, with prior approval from the House of Representatives, use the state budget surplus to buy back government bonds from the secondary market to prevent a financial market crisis.

But emphasizing the character of a crisis situation that requires quick and firm decisions, the draft law stipulates that House approval for such a contingency measure shall be obtained within 24 hours after the request and such approval is needed only from the House budget committee, not from a plenary House session.

Such contingency bond purchases are based on the bond-stabilization framework that is a component of the crisis-management protocol. The framework involves the central bank and 11 state companies engaged in the management of insurance and pension funds. Then finance minister Chatib Basri also signaled the need for setting up a US$5 billion bond-stabilization fund in 2013 and 2014.

Bank Indonesia, as part of the bond-stabilization framework, intervened in the market in the first two weeks of last March, aggressively buying government bonds when there was a sudden outflow of capital almost to the tune of $760 million.

Such intervention is crucial to stabilize the market and bond yields, to improve liquidity and to anchor currency stability because foreign ownership of government bonds as of August amounted to Rp 533.4 trillion ($39 billion) or almost 40 percent of the total amount (Rp 1.37 quadrillion) of tradable government bonds.

Foreign portfolio investors are still interested in Indonesian government bonds due to their high yields at about 8.7 percent, compared to 2.6 percent in Singapore and Thailand, 4.3 percent in Malaysia and 2.1 percent in the US. Latest data showed that more than 45 percent of the government bonds held by foreign investors are of maturity of 10 years or more.

But a rise in the US Fed fund rate, widely expected later this year, or a sudden deterioration of the economy, could set off a massive outflow from government bonds.

But bond purchases by the central bank also can be used to control liquidity in the banking system, especially now when the demand for credit has declined due to the weakening economy and the fact that the banking industry had an excess liquidity to the tune of Rp 240 trillion as of early this month.