The Jakarta Post
The government and Bank Indonesia (BI) agreed to a burden-sharing scheme worth Rp 574.59 trillion (US$39.7 billion) on Monday to finance the nation’s COVID-19 response and bolster economic recovery efforts.
The scheme will see the central bank buying Rp 397.5 trillion in government bonds at a maximum coupon rate to correspond with the benchmark BI seven-day reverse repo rate (7DRRR) to fund health care and social safety nets. The central bank will then return the bond yield to the government in full on the same day it is paid.
The 7DRRR is currently at 4.25 percent.
BI will also bear the costs of the government's stimulus package for small and medium enterprises (SMEs) as well as large businesses, which is estimated to generate Rp 177 trillion in debt.
The government plans to sell the bonds to the market with BI as a standby buyer. The central bank will also contribute to the costs, to be determined as the difference between the market rate and the BI 3-month reverse repo rate, minus 1 percent. The government will then fully repay the debts raised in the market to finance its “non-public goods” stimulus package, which includes capital injection for state-owned enterprises (SOEs).
The scheme will be implemented only for this year and the bonds will be tradable, which will allow Bank Indonesia to use them for its monetary operations.
“The government and the central bank will still maintain fiscal and monetary prudence to ensure macroeconomic credibility in supporting growth and to create jobs,” Finance Minister Sri Mulyani Indrawati told reporters on Monday. “The policy aims to increase confidence in economic recovery and the healthcare response,” she said.
Sri Mulyani added that the scheme had the support of President Joko “Jokowi” Widodo and the House of Representatives.
The bond burden-sharing scheme will help fund the government's budget deficit this year, projected to reach 6.34 percent of gross domestic product (GDP) with the government allocating Rp 695.2 trillion toward COVID-19 mitigation and economic recovery.
The central bank has thrown a lifeline to the state budget amid the foreign selling spree in the government bond market and declining investor appetite for Indonesian debt papers.
BI has bought Rp 30.33 trillion of government bonds as a non-competitive bidder in direct auctions and has also bought Rp 166.2 trillion of bonds in the secondary market to help stabilize the rupiah. It has also cut its benchmark interest rate three times this year as it steps up quantitative easing to help buffer the battered economy.
Although the burden-sharing scheme would affect the central bank’s balance sheet, it would not have any implications on the central bank’s monetary policy, said BI Governor Perry Warjiyo.
“Our capital is strong enough, as the scheme will not affect our monetary policy that [has been] established for years,” the governor said. BI also had “an exit strategy that will be announced later”, he said, which included raising banks’ reserve requirement ratio after the pandemic subsided.
Perry expressed optimism that the burden-sharing scheme would not significantly boost the country’s inflation, which hit its lowest level since 2000 in June, despite the central bank injected cash into the economy. He pledged that the central bank would monitor the policy’s impact to the country’s currency.
The rupiah appreciated 0.59 percent as of 11:12 a.m. Western Indonesia Time on Tuesday to Rp 14,405 per US dollar, after tumbling more than 2 percent last week following the announcement that BI and the government were discussing a debt monetization scheme.
“The monetization comes at the right time, as inflation remains low at below 2 percent,” Bank Central Asia (BCA) chief economist David Sumual told The Jakarta Post by phone interview on Monday. He added that the fiscal stimulus should be “the right dosage and in keeping with the fundamentals”, otherwise it would affect inflation in the long term.
“There is a risk of higher inflation from the impact of increasing the supply of money through the stimulus,” he cautioned.
Separately, Moody’s vice president Anushka Shah was of the view that the central bank has shifted its policy to “unconventional quantitative easing” to fund the government’s stimulus, adding that the scheme would reduce the government’s borrowing costs.
However, “the longer-term implications of the debt monetization [program] will be on the credibility and the strength of the monetary framework, as well as the central bank’s ability to ensure price stability,” she said during a discussion on Tuesday.
“BI has, over the years, established a credible monetary policy framework, […] but there are still a few aspects of the burden-sharing mechanism that are unclear, particularly on the exit strategy,” she said, referring to BI’s strategy to end the partial financing of the deficit.