The Jakarta Post
The burden-sharing scheme inked between the government and Bank Indonesia (BI) may affect the central bank’s monetary policy framework in the long run, international credit rating agency Moody’s has said.
Moody's vice president Anushka Shah said the debt monetization measure would not affect the country’s sovereign ratings in the short term but warned the policy might have implications on the central bank's credibility, as well as its ability to ensure price stability.
“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 with regard to the exit strategy,” she said in a webinar held by the agency on Tuesday, referring to BI’s strategy to end the partial deficit financing.
The government and Bank Indonesia (BI) agreed on Monday to a burden-sharing scheme worth Rp 574.59 trillion (US$39.7 billion) to finance the nation’s COVID-19 response and bolster economic recovery efforts.
The scheme will see BI buying Rp 397.5 trillion in government bonds at a maximum coupon rate to correspond with BI’s benchmark interest rate of 4.25 percent to fund health care and social safety nets. The central bank will then return the yield to the government in full on the same day it is paid.
BI, together with the government, will also bear the debt costs of the government's stimulus package for small and medium enterprises (SMEs) and large businesses, which is estimated to generate Rp 177 trillion in debt.
The scheme will be implemented only for this year and the bonds will be tradable, which will allow BI to use them for its monetary operations.
The government expects to raise Rp 900 trillion in this year’s second half, after raising Rp 630.5 trillion in the first six months, to cover the state budget deficit, which is projected to reach 6.34 percent of GDP.
It has unveiled a Rp 695.2 trillion stimulus program to rescue the economy from meltdown and to strengthen the healthcare system as the COVID-19 pandemic batters the country.
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Although Indonesia entered the crisis with strong fiscal buffers, the country’s fiscal strength will deteriorate the most among emerging economies in Southeast Asia, Shah said.
“We expect that debt affordability will worsen for all sovereigns as interest costs will rise and revenue collection will drop, but it will particularly hurt Indonesia and Malaysia where affordability metrics were already weak,” Shah said.
Indonesia’s high proportion of foreign currency denominated debts, she went on to say, would further hurt the fiscal condition “due to implications from market volatility and higher debt costs with currency depreciation.”
BI Governor Perry Warjiyo said on Monday that 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.
“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.
Meanwhile, Bank Mandiri chief economist Andry Asmoro said the central bank’s decision would increase money supply by around 14.4 percent, adding that it would contribute to an increase in inflation by 0.43 percent to reach 2.69 percent by year-end.
“The increase in money supply may depreciate the rupiah's exchange rate against the US dollar by 1.73 percent,” he went on to say, expecting the country’s currency to stand at Rp 14,296 per dollar by year-end.
The rupiah slightly depreciated by 0.02 percent as of 12:16 p.m., Western Time Zone, on Wednesday to Rp 14,442 against the greenback.
Bank CIMB Niaga chief economist Adrian Panggabean projected Indonesia’s debt coverage ratio would deteriorate this year, adding that sovereign risk perception was on the rise over the medium and long term.
“The market starts to price-in those factors on their spreadsheets and that will make assets in the market turn somewhat wobbly,” he told The Jakarta Post on Tuesday. “The ability to manage such risks are among the most important policy challenges going forward.”