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Jakarta Post

Government debt issuance to triple to $62b as Indonesia fights COVID-19

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Wed, April 8, 2020   /   01:23 pm
Government debt issuance to triple to $62b as Indonesia fights COVID-19 Rupiah and US dollar notes are arranged side by side at a bank. The government has increased deficit spending in the state budget to Rp 1 quadrillion (US$61.55 billion) this year, a 286 percent jump from the initial target of Rp 351.9 billion. (Antara/Rosa Panggabean)

Indonesia’s new debt is expected to triple this year as the government struggles to fund its fight against the COVID-19 pandemic.

According to the newly enacted Presidential Regulation (Perpres) No. 54/2020 on the 2020 state budget revision issued on April 3, the government has increased deficit spending to Rp 1 quadrillion (US$61.5 billion) this year, a jump of 286 percent from the initial target of Rp 351.9 billion.

The government plans to offer sovereign debt papers worth Rp 549.6 trillion, an increase from the initial Rp 389.3 trillion, while also planning to raise Rp 450 trillion in “pandemic bonds”, given that demand for government bonds has significantly declined.

Finance Minister Sri Mulyani Indrawati said on Monday that the government would look for safe financing sources, including the option to use the endowment fund for education (LPDP) as well as accumulated cash surplus (SAL), but said that “would not be enough”.

Read also: Indonesia’s COVID-19 stimulus worth 2.5% of GDP, lower than Singapore, Malaysia

“Therefore, we need to issue government debt papers to look for the best financing sources. We will be extra careful in navigating these uncharted waters,” she told House of Representatives Commission XI, which oversees financial affairs, on Monday.

President Joko “Jokowi” Widodo has announced additional state spending worth Rp 405.1 trillion to finance Indonesia’s battle against the novel coronavirus pandemic. The new allocation will be used specifically for healthcare, social safety net and business recovery programs.

The state budget revision now targets Rp 1.76 quadrillion in revenue, lower than the Rp 2.23 quadrillion previously set out in the 2020 budget. Expenditure, meanwhile, jumps to Rp 2.61 quadrillion from the Rp 2.54 quadrillion targeted previously. The government has widened its state budget deficit beyond the previous 3-percent-of-GDP cap to around 5 percent this year, in line with a new government regulation in lieu of law (Perppu) to lift the legal limit.

On Thursday, Indonesia raised $4.3 billion, including from the longest-dated US dollar bond ever issued by an Asian nation with a 50-year tenure, to support government funding. The deal was finalized in the United States on Monday and sold in maturities of 10.5 years and 30.5 years, worth $1.65 billion each, with a 50-year tranche worth $1 billion, Reuters reported.

“It is likely that, during this period, the ownership structure of government securities will change to some extent with foreign investors’ lowering their holdings considerably and BI [Bank Indonesia] seen to expand its balance sheet,” according to a research note by Fitch Solutions’ country risk and industry research team on Tuesday.

Read also: Indonesia’s COVID-19 stimulus playbook explained

Perppu No. 1/2020, issued last week, allows the central bank to buy government bonds at auction to anticipate a situation in which 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.

Demand for Indonesian debt papers declined sharply in March, 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 in bids and absorbed Rp 22 trillion.

Foreign investors have dumped 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 show.

Fitch Solutions was of the view that, if the rupiah continued to depreciate rapidly as BI extends its government bond holdings, the Indonesian economy could enter a sovereign debt crisis, as the central bank bled foreign reserves.

Read also: BI to dominate ownership of 'pandemic bonds' as debt burden grows

“For now, this is not our core view, as we expect the recovery off the back of the COVID-19 outbreak to be robust,” Fitch wrote. “Moreover, Finance Minister Sri Mulyani has a good track record of fiscal discipline, and it is likely that, once the worst is over, she will ramp up efforts to bring government spending back in line and broaden the revenue base.”

Fitch Solutions now expects the country’s public debt to average 45.3 percent of GDP during the period of 2020-2023 versus 33.1 percent in the last five years.