There are two sources of domestic external financing for domestic corporates in Indonesia, which are bank lending and capital market. While other countries has ample stocks of both, the total that Indonesian corporates can access currently is just around 20 percent of their investment needs per year. The gap therefore will be funded mostly by corporates’ internal funds.

Big domestic investors in Indonesian capital market such as social security funds is also in the dearth of capital with total asset together of only less than 20 percent of Gross Domestic Product (GDP) which makes its contribution not ample even if their asset allocation policy is changed. Other countries for example Malaysia has almost 60 percent of GDP of social security funds.

Although Indonesia has benefiting demographic profile and already started to implement mandatory social security scheme, there is structural challenge for this type of funds to grow which is the high proportion of informal economy in Indonesia. Based on Indonesian Bureau of Statistics, 60 percent of active workers are non-salary based workers.

With pressing investment financing challenges, corproates should explore more innovative ways to mobilize foreign funds. One way to do it is by creating instrument that both could match the foreign investors’ appetite and less risky for corporates.

There is one big challenge for corporates to borrow from outside of Indonesia, which is the mitigation of the currency risk. If the instrument is to be issued in foreign currency, which is normally the case, there will be huge currency risks that will be carried by our domestic corporations. Learning from 1998 Asian crisis, this is probably not the best idea to implement.

Starting from the beginning of 2017, rupiah has been relatively stable compared to its historical datas. Ideally, this will be a positive factor for foreign investors to increase their cross-border investment appetite. A study by Yie and Yoo (2010) articulated that the foreign investors’ lending appetite which is reflected in the risk premium moves together with local currency external values.

However, at the same time, based on Bank Indonesia’s foreign debt statistics, the trend of private foreign debt has been declining since end of 2016 to current growth of negative 1,4 percent (year on year). Currently, our private foreign debt is still quite high, which is accounted for 49,2 percent of total foreign debt.

Some policies such as implementation of Bank Indonesia’s hedging regulation may be attributable to this declining trend. In 2016, Bank Indonesia made it mandatory for domestic banks to hedge their foreign exchange position. Although aiming for better vulnerability management, it potentially create externality effect such as reducing coporates’ appetite to borrow from foreign lenders.

Based on the two main reasons above which are the lower perceived risk of rupiah as well as regulation factor, there is a room for rupiah global bonds to become alternatives for corporates to finance their investment.

Rupiah global bonds is bonds denominated in rupiah but issued and traded outside Indonesia. Although it is a relatively new instrument in Indonesia because our global government bond for instance has been issued in internationalized currency such as US dollar, the potential is very huge.

There are approximately 38,98 percent of our local currency government bonds held by foreign investors while almost zero percent of our corporate bond is. To further depict this high potential, the foreign ownership in our stock market is accounted for 48,47 percent of total market capitalization. The two figures reflected the big appetite of foreign investors toward domestic financial assets.

From foreign investor point of view, this instrument is going to be very attractive given today’s global financial market liquidity especially in the middle of very low or even negative interest rate era in advanced economies such as Europe and Japan. Second, the recently upgraded credit rating of Indonesia by Standard&Poor’s that we believe will lower the perceived risk for investing in Indonesia in general.

However, there are still generic challenges for foreign investors to invest in rupiah bonds, which is the availability of hedging tools given the current central bank policy that limits rupiah supply overseas. Besides, liquidity of corporate bond market is generally very low which makes it hard for foreign investors who like to trade their bonds.

To make it grow, therefore, there are multiple steps. First, the transaction should be designed to be open for settlement in rupiah or US dollar as well as domestic or overseas. The latter is especially for foreign investors that does not have representative in Indonesia. If corporates want to attract wider investors, this should be top priority.

Second, there should be market makers in the corporate bond market. It is basically copying government’s current strategy to assign some banks to act as “primary dealers” to trade their government bonds in the secondary market so it becomes liquid. This is especially relevant if corporates is aiming at long term funds.

Third, government should ensure a fair taxation. Such cross-country transaction is prone to double taxation given the involvement of two different jurisdictions. Currently, based on government regulation number 100/2013, such tax is subject to tax treaty between the two transacting countries.

Fourth, the transaction should not be treated as foreign debt which will be subject to heding regulation. It matters because the corporates will get the funding and give the paybacks plus interest in rupiah so there is no currency risk for the issuers. The only aspect that interferes criteria of foreign debt is the possibility of increasing rupiah demand overseas.

Last but not least, in the middle of growing foreign investors attention toward Indonesia’s infrastructure sectors, and with low credit risks too, infrastructure-related SOEs could be promoted first for the rupiah global bond initiatives. Indonesian state-owned tollroad company Jasa Marga in July was reported considering this method to finance an ambitious highway project.

If it is utilized optimally, it will gain benefit from the recent momentum of other countries’ similar initiatives such as China’s dimsum bonds and India’s masala bonds.

Despite of the reasonability, the implementation needs to be accompanied with ample supervisory activity by Indonesian Financial Supervisory Agency so that financial system stability is well preserved.

***

The writer is an Economist in the Centre of Macroeconomic Policy in the Finance Ministry’s Fiscal Policy Agency. This is her personal view.

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