The Jakarta Post
Bank Indonesia (BI) directly purchased Rp 1.7 trillion (US$108 million) worth of sharia sovereign bonds during an auction held by the government on Tuesday, the first such direct purchase since the government issued the COVID-19 stimulus playbook.
The central bank acted as a noncompetitive bidder during the auction and only bought “a small portion” of the bonds in order to maintain low inflation levels, BI Governor Perry Warjiyo said. The government pocketed a total of Rp 9.98 trillion of proceeds from the auction to finance the country’s widening budget deficit.
“BI acts as the last resort when the market is unable to absorb all of the offers,” Perry told reporters during a regular media briefing on Wednesday. “We projected that most of the bonds would be absorbed by the market and the central bank would only buy a small portion of them.”
The government issued on Tuesday six series of sharia bonds, aiming to raise Rp 7 trillion to Rp 14 trillion to finance the 2020 state budget. It raised Rp 9.98 trillion from the total incoming bid of Rp 18.8 trillion, according to the central bank governor.
Regulation in lieu of Law No. 1/2020 issued in March allows the central bank to purchase government bonds directly at auction or in the primary market. Previously, the central bank was prohibited from buying government bonds except in the secondary market.
Perry said the central bank and the Finance Ministry had reached a deal to limit BI’s ability to buy government bonds by allowing BI to only buy a maximum of 30 percent of a sharia bond issuance target and 25 percent of conventional government debt papers.
“This is to ensure that its impact on inflation remains anchored,” Perry said, adding that the central bank forecast inflation to reach 2.82 percent this month, remaining within BI’s target of between 2 and 4 percent.
The government and the central bank, Perry added, had signed a memorandum of understanding stipulating that before the central bank buys government bonds, the government must maximize other sources of funding including through the issuance of global bonds. Furthermore, the government must issue the bonds through market mechanisms and the issued bonds must be tradable ones for the central bank to conduct monetary operations.
The government will issue nearly Rp 450 trillion worth of so-called pandemic bonds to finance the country’s efforts to combat the health crisis and economic turmoil caused by the COVID-19 pandemic, according to a Finance Ministry document.
Apart from the pandemic bonds, the government is also planning to increase its bond sales target by Rp 160.2 trillion to Rp 549.6 trillion this year to address the widening budget deficit, which could reach 5.07 percent of gross domestic product (GDP).
Foreign investors bought Rp 4.37 trillion of government bonds from April 13 to April 20 despite a selloff of Rp 2.8 trillion by foreign investors in the stock market during the same period, BI data showed.
“This reflects that there is increasing confidence in Indonesia,” Perry said, citing the country’s attractive yield compared to other developing nations. “This will support the stability of the rupiah exchange rate, which will strengthen to Rp 15,000 to the United States dollar by the end of 2020.”
Indonesia’s financial markets have been hit by the adverse impacts of the coronavirus pandemic and the country’s currency has depreciated around 12 percent against the US dollar so far this year.
Bank Permata economist Josua Pardede said BI's intervention in the primary market would boost confidence among investors, adding that it would provide stability to the country's debt market.
"Even though BI's bond buying is relatively small, it instills positive sentiment among market players," he told The Jakarta Post on Wednesday.