Indonesia Revamps Debt Strategy to Slash Sales by $20 Billion

Indonesia’s bonds are set to get another boost as the government downsizes its debt sale plan by nearly $20 billion, despite lingering concern over the budget deficit.

Southeast Asia’s largest economy reduced its 2021 net bond issuance target, allotting only 460 trillion rupiah ($31.7 billion) for its auctions in the second half of the year, nearly 40% less than its initial plan. Slow state spending has piled up 136 trillion rupiah of unspent cash as of June, and the government will also use funding from international loans.

The new borrowing strategy, unveiled last week, could throw Indonesia a lifeline. Its unused cash balance is “a ‘deus ex machina,’ a timely savior” that will allow the government to expand social assistance during the partial lockdown, without raising its budget or its borrowings, said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp.

Indonesia has emerged as the new epicenter for the coronavirus pandemic, with daily infections and deaths overtaking those of Brazil and India. The government is considering whether to extend virus curbs that were imposed July 3 and announced nearly 40 trillion rupiah in additional aid for those hardest-hit by the measures.

Like other emerging markets, the country is faced with the double burden of having to spend to battle one of the world’s worst outbreaks, while keeping its finances in order to ensure foreign funding remains intact. The government has stood by its pledge to cut down the budget deficit from 5.7% of gross domestic product this year to 3% by 2023, even as the virus resurgence is set to hamper its efforts.

Opportunistic Strategy

“The strategy of using excess cash to reduce issuance is an effort to maintain bond yields and reduce interest expenses,” Luky Alfirman, the finance ministry’s director general for budget financing and risk management, said by text message. “In managing debt, the government applies a prudent, flexible and opportunistic strategy.”

Government bond auctions have seen robust demand, and plans for a smaller issuance could push investors to be more aggressive with their bid yields, said Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas.

In the longer term, it will still be challenging for Indonesia to follow its timeline for narrowing the budget deficit. S&P Global Ratings sees the shortfall at 6% of GDP this year if virus curbs last for a month and 6.3% of GDP if they go on for longer. The debt watcher earlier flagged that the Covid spike is raising the country’s credit risks.

“Presently, we expect the government will still attempt to quickly consolidate its finances from 2022 onwards,” though this would depend on the health of the economy, said S&P director Andrew Wood. “That the fiscal deficit is meaningfully curtailed by 2023 and 2024 is a very important trend that we will be watching for the sovereign ratings.”

Wider Shortfall

Oxford Economics Ltd. sees a bigger impact, forecasting a wider shortfall of 6.5% of GDP this year that should have knock-on effects over the medium-term. The country’s fiscal deficit will only narrow to 3% of GDP by 2024 due to pandemic-related spending, economist Sung Eun Jung said, adding that a prolonged outbreak could push this back to as late as 2025.

For now, investors are buying up the notes. Indonesia’s bonds have led gains in Asia this past month, with the 10-year yield easing 22 basis points to trade at 6.32% as of Monday.

“Indonesian government bonds have been one of our top picks from a real yield differential perspective. The confirmation that there is no additional supply pressure and instead with lowered issuance shall further support the domestic bonds, rendering them resilient,” OCBC rates strategist Frances Cheung added.

©2021 Bloomberg L.P.

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