Indonesia Burden Sharing Agreement

The government and Indonesia Bank (BI) have agreed on a burden-sharing system for government bonds (SBN), as said Finance Minister Sri Mulyani. The burden-sharing agreement, presented last week, provides for Indonesia (BI) to buy about $28 billion in bonds that the government intends to issue to finance its COVID 19 stimulus plans, while renouncing interest payments. Indonesia Bank (BI) bought 82.1 trillion pounds ($5.64 billion) of government bonds in a private offer, marking the first transaction under the government`s burden-sharing agreement to finance the budget deficit resulting from the country`s COVID 19 response. Each series offers a three-month bi-reverse-repo game with a coupon of 3.84 percent each. The four series matured VR0046 on October 12, 2025, VR0047 matured on October 12, 2026, VR0048 maturing October 12, 2027 and VR0049 matured on October 12, 2028. To date, the government has spent a total of 229.68 trillion RP on IB as part of the allocation of charges. It is a burden-sharing system between the Minister of Finance as the financial authority and the IB as a monetary authority to cover funding needs to accelerate the ERP due to the impact of the COVID 19 epidemic. The government has issued four sets of variable rate bonds and can be traded. “This operation is part of the burden-sharing program between the government and Indonesia Bank to finance the effects of the COVID 19 pandemic and the national economic recovery,” said Luky Alfirman, Director General of Financing and Risk Management at the Ministry of Finance, in the statement. Fortunately, senior policymakers in the Ministry of Finance are sensitive to the need to maintain confidence in financial markets. Official statements on the “Burden Sharing” programme underlined the temporary nature of the agreement.

The Indonesian authorities have pointed out that the burden-sharing agreement sets a precedent for future debt monetization, but investors will be cautious if the system is extended beyond 2020. The central bank`s profitability will certainly take a hit, but given the circumstances and the fact that other global central banks are offloading unconventional monetary policies, it is likely that investors will give the central bank the benefit of the doubt for now. In the short term, price pressure due to the impending supply of liquidity is expected to be marginal given the depressed economic situation, with inflation currently at the bottom of the central bank`s target of 2-4%. Economic growth will contract in the second quarter and remain subdued for the annual balance and, therefore, we agree with BI Governor Perry Warjiyo that inflation is likely to emerge within the target in 2020, even with the provision of liquidity from bond purchases that borrows burden-sharing bonds. However, we assume that in the short term, the IDR will be subject to some devaluation pressure, probably offset by a continued triple intervention by the central bank.