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Bonds for all
Unfortunately, individual participation in the bond market has been low. Retail investors account for 3 percent of tradable government bond ownership.
A Bank Mandiri teller counts rupiah banknotes in Jakarta on Jan. 6. (JP/Nurhayati)
T
he recent uptick in the financial markets, from stock prices to bond yields and the rupiah exchange rate, has raised questions about the sustainability of the gains. The benchmark Jakarta Composite Index (JCI) gained 5.6 percent in the past month, but has lost nearly 23 percent year-to-date. Meanwhile, the rupiah rose 6.2 percent within a month but has depreciated 1.1 percent so far this year.
For retail investors, whose income may be affected by the COVID-19 pandemic, the recent market environment may discourage them from further investing in the capital market, as evident in the decline in mutual fund top-ups in the first quarter of the year. For investors whose savings may be eroded by price fluctuations in the market, bonds may provide steadier ground.
The fixed-income nature of the debt papers, through their coupon rates, provides certainty at a time when price swings in the market may erode consumers’ savings. Data from Mandiri Sekuritas presented in a recent webinar held by The Jakarta Post show total returns in Indonesian sovereign bonds have been higher than those of the JCI and other emerging market sovereign bonds in the past year.
Unfortunately, individual participation in the bond market has been low. Retail investors account for 3 percent of tradable government bond ownership. Mutual funds, insurance funds and pension funds, respectively, account for 4.4 percent, 9 percent and 7.4 percent, while foreign investors and banks dominate at 30.5 percent each.
The two major issues hindering retail investor participation in the bond market are the infrastructure for trading and low public awareness about investment in debt papers. Bond trading normally takes place between brokers and dealers in large institutions. Retail investors may only participate in retail government bond issuances or by investing in mutual funds with fixed incomes.
The Indonesia Stock Exchange’s (IDX) plan to develop an electronic trading platform that will include government bonds is highly anticipated, especially since the government is planning to fund its COVID-19 battle through debt financing.
The government’s Rp 677 trillion (US$48 billion) COVID-19 budget will be financed by Rp 1.2 quadrillion in debt financing, primarily including government bonds. It may issue Rp 50 trillion to Rp 70 trillion in retail bonds (ORI) this year, giving more chance for retail investors to enjoy the gains that would otherwise be taken up by foreign investors and banks.
With the low-interest rate environment expected to take hold in the short- to medium-term, savings in bank deposits will be less attractive. Meanwhile, stock market volatility may discourage retail investors.
Investing in bonds needs promotion so as to diversify the public’s investment options. More diversified retail investors will benefit from the fixed-income nature of the instrument. This may be especially relevant for households and institutions with excess funds to invest cautiously in a time of uncertainty.
The government needs to raise public awareness of bonds especially during the process of the retail bond (ORI017) currently being offered until July 9. Access should be given to the broader public, and the basic infrastructure, from selling agents to the stock exchange, needs to be improved for a more inclusive investment environment.
