The Jakarta Post
Indonesia will raise nearly Rp 450 trillion (US$27.21 billion) in “pandemic bonds” to finance the country’s efforts to combat the health crisis and economic turmoil caused by the COVID-19 pandemic as demand for government bonds has declined, an official document shows.
The government will also increase its bond sales target by Rp 160.2 trillion to Rp 549.6 trillion to address the widening budget deficit, which could reach 5.07 percent of gross domestic product (GDP), according to the Finance Ministry document.
“The government’s first line of financing will come from an endowment fund and accumulated cash surplus [SAL] but it will not be enough,” Finance Minister Sri Mulyani Indrawati told the House of Representatives Commission XI overseeing financial affairs in a video conference.
President Joko “Jokowi” Widodo has announced extra state spending worth Rp 405.1 trillion to finance Indonesia’s battle against the novel coronavirus pandemic, specifically for healthcare, social safety net and business recovery programs.
“Therefore, we need to issue government debt papers to look for the best financing sources. We will be very careful in navigating these uncharted waters,” she added. However, foreign investors have pulled out of the tradable government bond market, with a benchmark 10-year bond yield of 8.17 percent at 2:45 p.m. Monday, a 1.5-year high, indicating investors see increasing risk in Indonesian assets.
At auction, the demand for Indonesia’s debt papers has also declined sharply in March from February, according to official documents. At a Feb. 18 auction, the government saw Rp 127 trillion in bids and absorbed Rp 19 trillion, while on March 31 it only saw Rp 34 trillion and absorbed Rp 22 trillion.
Under the new Government Regulation in Lieu of Law (Perppu) No. 1/2020 issued last week, Bank Indonesia (BI) is now permitted to buy government bonds at auction to anticipate if the market is unable to fulfil the government’s financing target. The regulation revokes a 1999 law on the central bank, which only allowed BI to buy government bonds in the secondary market.
“We will be very transparent so as to maintain the credibility of our fiscal and monetary policies,” Sri Mulyani pledged in front of members of the House. The government is looking to BI to finance the budget deficit, as demand for government bonds declines.
The central bank has purchased Rp 172.5 trillion in government bonds, including Rp 166.2 trillion from foreign investors in the secondary market.
Indonesia’s financial markets have been hit by the coronavirus outbreak, with foreign investors having sold Rp 148.76 trillion in Indonesian assets, including Rp 135.08 trillion in government bonds and Rp 9.71 trillion in Indonesian shares, BI data shows.