TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search results
Popular Reads
Top Results
No results found. Please check your search term and try again
Can't find what you're looking for?
View all search resultsIs IndONIA the right anchor for floating-rate government bonds?
If Indonesia were to peg its floating-rate bonds to IndONIA, the government would in effect be subcontracting the cost of borrowing to the whimsical tides of near-term liquidity.
Change text size
Gift Premium Articles
to Anyone
Share the best of The Jakarta Post with friends, family, or colleagues. As a subscriber, you can gift 3 to 5 articles each month that anyone can read—no subscription needed!
Metallic plating that reads 'Bank Indonesia' displayed on one of the buildings in the central bank headquarter complex in Jakarta on July 17, 2024. (JP/Deni Ghifari)
W
hat's in a rate? For the ordinary retail investor, the benchmark underpinning a floating-rate bond is merely a technical aside, an esoteric detail, buried in prospectuses, quaintly forgotten as long as the coupons show up.
But for policymakers at the vanguard of fiscal and monetary policy, the reference rate underpinning government bonds is no trivial matter. It is a compass that steers. It determines how prices on debt move, how fiscal risk is predicted and how financial markets unfold, or fail to.
The Indonesian government is at a crossroads today. Having used the Bank Indonesia 7-Day Reverse Repo Rate (currently known as the BI Rate) for years as the reference rate for its floating-rate bonds, such as retail savings bonds and sukuk tabungan, the country is now contemplating the transition to IndONIA, the Indonesia Overnight Index Average.
At first glance, this proposal appears a step in the right direction towards modernization. IndONIA, naturally, is transparent, transaction-based and aligned with international best practice in benchmark reform. But there is a much subtler policy trade-off behind the simpleness, one that might revolutionize not just bond pricing but the very dynamics between the government debt and Indonesian macroeconomic stability.
The appeal of IndONIA is obvious. As a market-based rate derived from true interbank overnight transactions, it is a more accurate reflection of current levels of liquidity.
Unlike the BI Rate, which is reviewed on a periodic basis by BI Board of Governors and serves as a signaling device, IndONIA is an inert representation of the cost of funding on a daily basis. In a post-LIBOR world where quote-based benchmarks are discredited, transaction-based indices like IndONIA carry the aura of integrity and objectivity.
And the vision in the long term is appealing. By tying government bonds to IndONIA, Indonesia would be able to build out its money markets, support the emergence of a reliable yield curve and welcome an active derivatives community. All these are ingredients of a contemporary, resilient financial system.
