The Jakarta Post
Bank Indonesia (BI) has bought Rp 234.65 trillion (US$15.77 billion) worth of government bonds under the “burden sharing” scheme to fund the widening fiscal deficit, pledging continued support for the sluggish economy.
Of the total figure, the central bank has bought Rp 51.17 trillion worth of sovereign debt papers (SBNs) through auctions, as well as another Rp 183.48 trillion through private placement as of Sept. 15, BI Governor Perry Warjiyo said during a meeting with House of Representatives Commission XI overseeing financial affairs on Monday.
On that basis, BI currently owns Rp 640.6 trillion worth of SBNs.
“This is our commitment to support the economy through financing measures and bearing the debt burden so that the government can focus on spending the state budget,” Perry told the lawmakers, stressing that the central bank would continue buying government bonds through the scheme.
The government and the central bank have agreed on a $40 billion debt monetization scheme, dubbed “burden sharing”, which will see BI buying at least $28 billion in government bonds while shouldering the debt costs.
The coronavirus-induced economic downturn has sapped tax revenue, spurred government spending and necessitated record amounts of government borrowing as the country’s budget deficit may widen to 6.34 percent of gross domestic product (GDP), more than twice the initial deficit cap of 3 percent.
The government, however, has only spent around 36 percent of the Rp 695.2 trillion stimulus it allocated to help the economy due to red-tape, among other issues.
The pandemic pushed the economy into a contraction of 5.32 percent in the second quarter. Finance Minister Sri Mulyani Indrawati said the government had revised down its GDP outlook to an annual contraction of between 0.6 and 1.7 percent as the uncertainty surrounding the pandemic had taken a significant toll on consumption and business investment.
Consumption, which accounts for more than half of the nation’s GDP, is now expected to remain weak and to contract between 1 and 2.1 percent, while investment is expected to shrink between 4.4 and 5.6 percent as demand and economic activity remain cool.
The economy has shown substantial improvement in the third quarter compared to the second quarter as reflected by the purchasing managers’ index (PMI) and retail sales data, Perry went on to say. However, he also said the recovery remained slow amid the uncertainty surrounding the pandemic.
“Although the coronavirus pandemic has limited economic activity, we have seen signs of improvement in people’s mobility and economic activity,” he said. “The fiscal and monetary stimulus will help avoid significant deterioration in economic activity going forward.
BI has trimmed the policy rate four times this year by 1 percentage point in total, cut the reserve requirement ratio, eased lending rules and undertaken quantitative easing to support the economy. The central bank has disbursed Rp 662 trillion in quantitative easing measures.
The burden sharing scheme between the fiscal and monetary authorities would lower the government’s debt burden going forward, the Finance Ministry’s financing strategy and portfolio director Riko Amir said, adding that the debt-to-GDP ratio would be slightly lower than 40 percent of GDP, "which will be lower compared to other emerging countries”.
“This will mean the government has sufficient fiscal space to allocate spending in priority sectors post-pandemic,” he told The Jakarta Post recently. “The government will continue to increase state revenue and create efficiency in expenditure to control the debt growth.”
However, credit rating agency Moody’s Investor Service said Indonesia’s accumulated debt and falling tax revenue would weaken its “debt affordability” and might deteriorate its credit quality.
Debt affordability is a means of measurement used by Moody’s, calculated by the ratio of annual interest payments required to maintain a government’s debt to its annual tax revenues.
Although the deterioration in debt affordability will be modest in general for emerging markets, Indonesia will have interest payments to account for more than 20 percent of government revenue, the agency stated.
“We are not expecting a reversion to pre-coronavirus deficit levels in Indonesia until at least 2025,” Moody’s senior analyst Anushka Shah said on Sept. 16.