Indonesia launches $40 billion bond scheme to fund recovery

Indonesia unveiled a nearly $40 billion financing scheme for its fiscal deficit, with the central bank set to buy some 397.6 trillion rupiah ($28 billion) directly without receiving interest, to help fund the economic recovery, Finance Minister Sri Mulyani Indrawati said.

The bond-buying programme will help finance the 2020 fiscal deficit, which is forecast to reach 6.34% of Gross Domestic Product (GDP) this year, as the government steps up spending to fight the virus outbreak while revenue drops.

Bank Indonesia (BI) will also be a standby buyer and help pay some interest rate expenses for 177 trillion rupiah worth of bonds that the government will sell in auctions to fund recovery schemes for some businesses, she said. BI is set to pay the spread between market rates and its 3-month reverse repurchase rate minus one percentage point, she said on Tuesday.

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

The bond scheme for public interest programmes is a one-off policy, the debt will have long maturities and be tradeable, which will allow BI to utilise them for its monetary operation, she added.

BI Governor Perry Warjiyo said the scheme will have a small impact this year on 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 and cut its main policy rate three times this year to support GDP, on top of four cuts in 2019.

Warjiyo at BI’s last policy review had flagged the potential for more cuts.

The government expects Indonesia’s GDP to come in between a 0.1% contraction and a 1% expansion this year, compared with 5% growth in 2019.

The deal implied some bond supply risk as BI is unlikely to unload the bonds in the market in 2021 or 2020, an analyst said. “In our view, a pre-condition for unwinding would be if portfolio inflows are large enough relative to both the balance of payments and the fiscal year’s financing needs, such that any potential yield volatility could be managed,” Citi said in a note.

Meanwhile, an Indonesia-Australia deal that eliminates most trade tariffs between the two nations and aims to open up investment, took effect on Sunday, Indonesia’s Trade Ministry said.

The Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), signed last year and ratified by the Indonesia’s parliament in February, aims to boost bilateral trade that was worth $7.8 billion in 2019.

“COVID-19 has resulted in economic slowdown in nearly all countries,” Trade Minister Agus Suparmanto said in a statement. “IA-CEPA momentum can be used to maintaining Indonesian trade and improve competitiveness.”

In a signing ceremony last year, the two countries said the pact would eliminate all Australian tariffs on imports from Indonesia, while 94% of Indonesian tariffs would be gradually removed.

Australia aims to boost exports including wheat, iron ore and dairy, while Indonesia hopes to increase automotive exports, textile and electronics. The deal opens up investment, including for Australian universities in Indonesia.

The ministry said in the statement it has issued three regulations to allow for implementation of the deal.

Seperately, Indonesia imposed a 10% value-added tax on sales by technology firms including Amazon, Netflix, Spotify and Google on Tuesday, as spending patterns shift with increased remote working as a result of the coronavirus crisis, which has hit state finances.

The Southeast Asian country’s tax office said in a statement that it had already assigned tax identification numbers to Amazon Web Services, Netflix, Spotify and Alphabet’s Google for its Google Asia Pacific, Google Ireland, and Google LLC units.

Indonesia, the world’s fourth most populous country with a population of nearly 270 million, is experiencing a boom in its digital economy which is expected to reach $130 billion by 2025, a study by Google, Temasek Holdings and Bain & Company predicts. It expects a 13% yearly drop in state revenue this year as the pandemic hits business activity, which combined with nearly $50 billion for the fight against the coronavirus is forecast to more than triple its 2020 budget deficit.

Reuters