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Jakarta Post

BI to monitor liquidity as govt front-loads bonds

Bank Indonesia (BI) will intensify its monitoring of liquidity in the banking system in the first half of this year as the government’s front-loading bond issuance scheme may crowd out the market

Tassia Sipahutar (The Jakarta Post)
Jakarta
Mon, January 25, 2016

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BI to monitor liquidity as govt front-loads bonds

B

ank Indonesia (BI) will intensify its monitoring of liquidity in the banking system in the first half of this year as the government'€™s front-loading bond issuance scheme may crowd out the market.

According to BI Governor Agus Martowardojo, the central bank will carry out expansionary measures if the government'€™s financing efforts result in higher liquidity than predicted.

'€œWhat we must watch out for is the first half because there will already be the Idul Fitri holidays and tax payment obligations. But the government'€™s funding disbursements may not be that high yet,'€ he said on Friday.

The limited funds in the market may be absorbed even faster by the government when it issues its debt papers (SBN).

As previously reported, the government has expressed its intention to repeat the same financing scheme as applied in previous years by selling 60 to 61 percent of this year'€™s total debt target by the first half.

The full year target for 2016 has been set at Rp 532.4 trillion (US$38.37 billion) with around 60-61 percent, or around Rp 319.44 trillion to Rp 324.76 trillion, expected to be collected by the end of June.

Such a situation may lead to banks competing for customer funds by offering higher interest rates in their time deposits, similar to what happened in 2014.

Meanwhile, Agus also highlighted the government'€™s plan to convert regional funds (a state budget fund allocation for the regions) into debt papers, particularly for regions that tend to record low budget absorption.

Agus said the move would limit liquidity among regional development banks (BPD) as well.

'€œSo, we will make sure there is sufficient liquidity in the market by purchasing the SBN and auctioning term deposits, among other mechanisms,'€ he added.

The latest banking statistics published monthly by the Financial Services Authority (OJK) revealed that liquidity among commercial banks had begun tightening from last June, albeit at a slow pace.

The loan-to-deposit ratio (LDR) '€” the main benchmark for liquidity '€” rose to 90.5 percent in November from 88.5 percent in June.

Separately, BI senior deputy governor Mirza Adityaswara said that the central bank had taken several measures to pump liquidity into the system, including by lowering the reserve requirement ratio (GWM).

The GWM was lowered to 7.5 percent from 8 percent in November and became effective on Dec. 1. BI claimed that the 50-basis point reduction could immediately bring in an extra Rp 18 trillion in funds into the banking system, and that these funds could be channeled as loans.

BI has also lowered the rates of its deposit facilities as part of its monetary operations. At present, BI'€™s deposit facilities comprise overnight, one week, two week, one month, three month, six month, nine month and 12 month facilities.

While the overnight facility saw its rate fall 25 basis points to 5.25 percent, the 12-month facility posted a 45 basis point decline to 6.7 percent.

'€œThe nine-month and 12-month facilities underwent the steepest decline, 45 basis points each. With lower interest rates, banks will hopefully be triggered to disburse their excess liquidity as loans, rather than keeping them at BI,'€ Mirza said.
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