Indonesia Nears Deal With Central Bank on Deficit Funding

(Bloomberg) -- Indonesia’s central bank may buy billions of dollars of sovereign bonds at zero interest, or below its benchmark rate to help the government finance a wider deficit arising out of stimulus measures to counter the fallout of the coronavirus pandemic.

Bank Indonesia may bear the full cost of an expanded health care and social safety net budget of 397.6 trillion rupiah ($27.6 billion) by buying government bonds at zero interest rate, Finance Minister Sri Mulyani Indrawati told lawmakers in parliament Monday. Discussions are also ongoing for the monetary authority to pick up about 123.5 trillion of bonds at 1% discount to the seven-day reverse repurchase rate to help micro-, small and medium enterprises, she said.

The central bank may receive the benchmark rate on bonds bought to assist non-SME corporates, according to Indrawati’s presentation in parliament. The government will bear the full cost of extending 329.3 trillion rupiah in stimulus to other sectors of the economy, it showed.

The finance ministry expects to reach an agreement with the central bank on the composition of the so-called burden sharing this week that may involve private placement of bonds with the monetary authority and market auctions, Indrawati said. The central bank’s interest burden from funding the deficit is seen at 37 trillion rupiah annually, or 54.8% of the total cost, she said.

The central bank is ready to share the burden of financing the budget deficit, Governor Perry Warjiyo told the lawmakers.

Scrapping Limit

Indonesia is rushing to raise funds to respond to the pandemic that’s battered Southeast Asia’s largest economy and rendered millions jobless. Authorities have announced almost $50 billion in fiscal incentives to cushion the economic and health blow, scrapping a legal cap of 3% on deficit introduced in the wake of the Asian financial crisis.

Indonesia Plans Samurai Bonds as Pandemic Triggers Wider Deficit

While bank Indonesia was already taking a more aggressive role in providing stimulus to the economy, buying sovereign notes directly from the government, a formal burden-sharing agreement will reduce the supply of bonds in the open market amid an exodus by foreign investors.

The burden sharing may also help faster transmission of central bank’s monetary policy besides lowering government’s cost of handling Covid-19 crisis, Josua Pardede, an economist at PT Bank Permata said. “It would also maintain market stability and hopefully keep Indonesia’s debt ratings from significant reduction,” he said.

The government expects budget deficit to swell to 6.34% of gross domestic product this year, needing it to raise 1.65 quadrillion rupiah to bridge the shortfall and repay maturing debt. It has so far raised 620 trillion rupiah from sale of bonds in the local and global markets, according to data from finance ministry.

Exit Strategy

While the move get Bank Indonesia to fund the deficit comes as no surprise to the market, investors may like authorities to relay an exit strategy, including a time-line toward normalization of everything from debt monetization to re-introduction of fiscal cap, said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp.

“The fact that a chunky portion of government deficit may soon be effectively financed at sub-market prices by the central bank will not escape market attention,” Wiranto said. “If the global conditions remain favorable, market may just close an eye on this.”

The yield on benchmark 10-year government bonds rose 4 basis points to 7.23%, trimming losses this month to 12 basis points, according to data compiled by Bloomberg.

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