BANK Indonesia’s plan to buy bonds that will be issued by the government to fund its ambitious housing programme is raising more concerns over the nation’s debt governance.
The plan for the central bank to effectively help fund the home-ownership scheme of President Prabowo Subianto is raising concerns over so-called debt monetisation and macroeconomic governance, analysts said. Bank Indonesia, which already plans to purchase more than US$9 billion of government bonds this year, said last week it would buy the newly announced property-linked debt in the secondary market.
While such bond buying is allowed under Indonesian law and has been a part of the central bank’s monetary policy, the linking of purchases to government spending “ventures into a new realm”, according to Helmi Arman, an economist at Citigroup in Jakarta.
“Investors may start pricing in the risk of fully-fledged debt monetisation,” Arman wrote in a research note on Monday (Feb 24). The increased perceptions of a threat to governance may push up the risk premium of holding Indonesian assets and slow foreign inflows, he said.
Debt monetisation refers to the practice of governments borrowing money from the central bank to finance public spending instead of issuing bonds to private investors or by increasing taxation.
The government’s planned bond sale was announced late Thursday by Finance Minister Sri Mulyani Indrawati, though the amount of issuance is not yet known.
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Bank Indonesia bought more than 800 trillion rupiah (S$66 billion) of the nation’s sovereign bonds between 2020 and 2022 in the primary market to help bolster the economy during the pandemic. This time around though, analysts and investors say there’s no similar macroeconomic stress to justify its commitment to buy debt linked to the housing market.
Carrying out debt monetisation now may give investors the jitters and pressure the currency due to concern that the “long-standing anchors of Indonesia’s financial stability are being weakened”, said Rajeev De Mello, a fund manager at Gama Asset Management.
The market’s concern about debt governance may help derail the current bond rally. Overseas funds have bought a net US$1.01 billion of the nation’s debt this year, according to data compiled by Bloomberg. The benchmark 10-year bond yield has dropped to around 6.77 per cent from as high as 7.3 per cent in the middle of January.
“The government must clarify what form such housing bonds will take,” said Lionel Priyadi, a fixed income and macro strategist at Mega Capital in Jakarta. “Otherwise, the market will interpret this as a potential widening of the budget deficit, which could potentially drive up the yield of government bonds.” BLOOMBERG
