Indonesia unveils $40 billion bond scheme to fund recovery from pandemic

Indonesia’s central bank has agreed to buy a total 574.59 trillion rupiah ($39.74 billion) of low-yielding government bonds this year to help fund the economic recovery programme, Finance Minister Sri Mulyani Indrawati said on Monday.

The bond-buying programme will help finance the 2020 fiscal deficit, which is forecast to reach 6.34% of GDP this year, more than triple an initial plan of 1.76%, as the government steps up spending to fight the virus outbreak while revenue drops.

Some 397.56 trillion rupiah of bonds will be used to finance public interest programmes and the cost will be fully borne by the central bank, Indrawati said. The rest will carry interest rates below the central bank’s 3-month reverse repurchase rate and will be used to support recovery schemes for some businesses, she said.

“This policy is aimed at invoking confidence in our economic recovery, healthcare response and to create more certainty,” Indrawati said.

The bond scheme will be a one-off policy and the debt tradeable, which will allow Bank Indonesia (BI) to utilise them for its monetary operation, she added.

BI Governor Perry Warjiyo told reporters the scheme will have a small impact on this year’s inflation, which hit a 20-year low in June due to weak demand, while BI will continue to assess the impact on future inflation and rupiah exchange rate.

Warjiyo added that the scheme will not have any implication to monetary policy.

“Our capital is strong and it will not affect how BI conducts our monetary policy according to the framework that we have established for years,” he said.

BI has intensified its “quantitative easing” operations in recent months to help cushion the economic slowdown. It has also cut its main policy rates three times this year to support GDP, on top of four cuts in 2019.

The benchmark 7-day reverse repurchase rate IDCBRR=ECI is now 4.25%, but Warjiyo at BI’s last policy review had flagged the potential for more cuts.

The government expects Indonesia’s GDP to be within a range of a 0.1% contraction to 1% expansion this year, compared with 5% growth in 2019, due to fallout from the pandemic.