Government Regulation in Lieu of Law (Perppu) No. 1/2020 stipulates that the government can issue bonds to fund COVID-19 relief efforts to be offered to Bank Indonesia (BI), state-owned enterprises (SOEs), corporate investors and retail investors.

The new rule will revoke a stipulation in the 1999 Bank Indonesia Law that prohibits the central bank from buying government bonds except in the secondary market.

“This will provide stimulus to the economy to prevent job losses and speed up recovery,” Permata Bank chief economist Josua Pardede told The Jakarta Post.

Read also: Indonesia to issue bonds to rescue businesses affected by COVID-19

Office of the Coordinating Economic Affairs Ministry secretary Susiwijono Moegiarso previously said that the government bonds, called “recovery bonds”, would be specifically used to fund rescue programs for businesses suffering from COVID-19 and prevent layoffs.

"The government will handle the proceeds of the funds to finance all businesses. This is to awaken business activities," Susiwijono said on March 26.

The only requirements for firms to receive funds from bond sales was that they must not lay off more than 90 percent of employees and their salaries must not be cut, Susiwijono said.

Wider deficit and financing risks

The new rule comes as Indonesia announces Rp 405.1 trillion (US$24.6 billion) in additional state spending for COVID-19 relief, with the budget deficit expected to widen to 5.07 percent of gross domestic product (GDP). The Perppu will also relax Indonesia’s self-imposed budget deficit legal limit at 3 percent of GDP.

“What remains unclear is how the widening deficit will be financed. Will the issuance of the recovery bond cover it? If so, will it then make the BI approach quantitative easing measures? What about a stipulation that prohibits BI from covering quasi-fiscal [operations]? Is this covered by the Perppu?” Center of Reform on Economics (Core) Indonesia research director Piter Abdullah said.

“This needs to be explained by the government.”

Read also: Indonesia announces Rp 405 trillion COVID-19 budget, anticipates 5% deficit in historic move

Of the Rp 405.1 trillion of extra spending, Rp 150 trillion has been allocated for an economic recovery program, which includes credit restructuring and financing for small and medium businesses, and Rp 75 trillion will be allocated for healthcare spending, Rp 110 trillion for social protection and Rp 70.1 trillion for tax incentives and credit for enterprises. 

“Indonesia’s financing challenges should not be underestimated, as the global economy now is facing tighter liquidity just when many governments are expanding their fiscal deficits,” Bahana Sekuritas economist Satria Sambijantoro said.

“The domestic rupiah-denominated bond market has limited liquidity and there are crowding-out risks for the banking sector, on top of the already high borrowing costs.”

Tradeable Indonesian government bonds have been traditionally absorbed by banks, foreign investors, insurers, mutual funds, pension funds and individuals. The central bank buys bonds in the secondary market to stabilize the rupiah as part of its market operation.

Bank Indonesia as lender of ‘last resort’

BI Governor Perry Warjiyo said the central bank would act as a lender of last resort rather than a first off taker of the government bonds issuance, which means the market will be prioritized to absorb the debt papers. He said the central bank had yet to determine the size of potential purchases.

“BI is granted the authority to buy government debt papers and sharia bonds not as a first lender but as a last lender in the case when the market cannot fully absorb the papers,” Perry said on Wednesday. “The finance minister has stressed that BI is a last resort. This we will maintain for macroeconomic stability.”

Finance Minister Sri Mulyani Indrawati said BI’s plan to directly buy government bonds in an auction would be crafted “very carefully” in a memorandum of understanding between the central bank and the Finance Ministry so as to avoid “reckless financing”.

Read also: ‘Triple market intervention’: BI buys bonds, rupiah to prop up prices amid viral rout

Prior to the Perppu issuance, BI bought government bonds in the secondary market worth Rp 168.2 trillion to stabilize the rupiah this year as foreign investors dumped Rp 125.2 trillion worth of government debt papers.

The capital outflow pressured the rupiah toward Rp 16,625 per US dollar on Monday, a level unseen since the 1998 financial crisis. The rupiah, Asia’s worst-performing currency so far this year, has depreciated around 15 percent since the end of December.

Worldwide trend

Central banks around the world are also throwing lifelines to fund the COVID-19 battle in their respective countries.

The US Federal Reserve pledged to buy an unlimited amount of US government bonds and corporate bonds. Meanwhile, European Central Bank chief Christine Lagarde asked euro zone finance ministers to seriously consider a one-off joint debt issue of “coronabonds” to help fight the coronavirus pandemic, Reuters reported.

The Philippines’ central bank will buy 300 billion pesos (US$5.8 billion) worth of debt from the country’s Bureau of the Treasury to help contain the impact of COVID-19.

“BI may buy the government bonds worth more than the Philippines’ counterpart since Indonesia is bigger economically, but it will eventually depend on the stimulus program,” said Josua of Permata Bank. “An expected fiscal deficit during this economic slowdown will need to be covered by domestic financing with a low interest rate.”

Read also: Philippine central bank throws $6 billion lifeline to government

COVID-19 cases rose to 1,528 on Tuesday with 136 deaths, the highest death toll in Southeast Asia and one of the highest death rates in the world. Indonesia last reported zero cases on Feb. 29.

President Joko "Jokowi" Widodo said that state spending would be focused on three areas, namely healthcare spending, social safety nets and incentives, and stimulus for small and medium businesses suffering from the crisis. The Indonesian economy could contract 0.4 percent under a worst-case scenario, while the baseline expectation is for economic growth to reach 2.3 percent this year.