MNI INSIGHT: Little Choice For Bank Indonesia In Funding Gov't

Indonesia's central bank is confident that its recent direct purchase of another USD30 billion of government bonds will both support domestic economic recovery and also reduce the risk of a debt sell-off by foreign investors which would weaken the currency, MNI understands.

Last week, Bank Indonesia and the Finance Ministry announced the purchase of another USD30 billion in government bonds, the third time the central bank has bought debt directly during the pandemic period. The Bank purchased USD57 billion in bonds last year in what it said was a one-off move.

The purchases have been called "burden sharing" by Bank Indonesia and the Finance Ministry but have raised concerns about policy credibility and the monetisation of debt.

MNI understands that the Bank recognises that the increasing scale of direct bond purchases has the potential to undermine confidence in Indonesia's sovereign debt, but points to high levels of foreign ownership of government bonds – at over 30% - as a sign that investors understand and have confidence in the market.

Bank Indonesia also calculates that the bond purchases will limit the impact of any tapering of U.S. bond purchases and so stabilise the rupiah. It sees the impact on inflation as muted, or delayed until 2023, with the 2021 forecast at between 2% and 4%.

BANK AWARE OF INDEPENDENCE CONCERNS

This eases pressure for any rise in the benchmark interest rate, which has been held at the record low of 3.5% after 150 basis points in cuts last year, see: MNI STATE OF PLAY: Bank Indonesia Signals Ongoing Easy Policy.

Governor Perry Warjiyo has said policy is likely to remain accommodative this year, effectively ruling out a rate rise.

With the Indonesian economy re-opening slowly after being closed since June, the central bank has revised its 2021 growth forecast down on several occasions. It is now at 3.5%.

The central bank sees an economic recovery as the ultimate test of the "burden sharing" policy, but it is aware of perceptions that its independence is being eroded by the direct bond purchases, as well as potentially by a bill before the Indonesian Parliament which would give the government more control over the central bank. Debate on that bill has been postponed and is not likely to resume until next year.

With the government's ambitious USD400 billion infrastructure plan and recovering interest from foreign investors in local equities, Bank Indonesia believes that it has little choice now but to play a role in funding fiscal policy at low interest rates while it hopes for no further resurgence of the pandemic.