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Bank Indonesia Governor Warjiyo announced plans to support the state budget by ‘burden-sharing’, at a parliamentary hearing this week. This was seen as a step to back the government’s priority projects, including food, housing, healthcare, and creation of village cooperatives, amongst others. Details on the exact plan of action were not announced, though the guidance is that a) this would involve purchase of bonds and b) there would be some extent of debt servicing subsidy i.e., half of the interest income that BI earns on bonds is likely to be shared back with the government. Governor added that the central bank had already bought IDR200trn worth bonds in the secondary markets this year. The reason behind the urgency to implement such a scheme at this juncture is unclear. To be sure, Indonesia’s bonds had outperformed other regional high-yielders in August (India and Indonesia bonds diverge, likely stretched at current levels).
The ‘burden sharing’ arrangement harks back to the pandemic years of 2020-22 when the central bank bought IDR 800bn from the government in the primary market to participate in the stimulus programs. Thereafter, to ensure that the maturity of Covid-era bonds maturing this year are non-disruptive, in late-2024 the BI announced plans to buy ~IDR150trn in 2025 as part of its monetary operations. Back to just-announced plans, to prevent such debt purchases from being perceived as partial debt monetisation or quantitative easing, it is preferable to keep to pre-defined limits and ensure that the overall scale is contained. While these bonds are likely to be bought in the secondary market, the central bank’s balance sheet will expand from current levels. BI currently owns about a quarter of the outstanding bonds, while foreigners’ share is ~14%. In the near-term, further sharp gains in the IDR bonds will be countered by caution after the weekend’s protests and debate over the need for a burden sharing arrangement at this point (Indonesia: Protests, politics and policies). Yesterday’s SRBI auctions are also saw an increase in incoming bids, as well as an uptick in the awarded returns.
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