Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  News  >  Economy & Forex  >  All News

News : Economy & Forex
Latest NewsCompaniesMarketsEconomy & ForexCommoditiesInterest RatesBusiness LeadersFinance Pro.CalendarSectors 
All NewsEconomyCurrencies / ForexCryptocurrenciesEconomic EventsPress releases

Indonesia's debt-sharing experiment worries rupiah investors

share with twitter share with LinkedIn share with facebook
07/13/2020 | 07:18am EDT

JAKARTA/SINGAPORE, July 13 (Reuters) - Indonesia's experiment to borrow money for free from the central bank has excited proponents of modern monetary theory and raised concerns about its effects on inflation and the rupiah. The "burden-sharing" agreement unveiled last week involves Bank Indonesia (BI) effectively buying about $28 billion worth of bonds the government plans to issue to finance its COVID-19 stimulus spending, while relinquishing interest payments.

The final plan, announced after months of tough negotiations between BI and the government, limits the central bank's debt-monetisation to this year.

Still, the lack of clarity on the tenor of bonds the BI will buy and how it will subsequently get rid of these bond holdings have analysts worried.

The rupiah, historically prone to volatile swings caused by inflationary pressures, has fallen more than 3% against the dollar in about three weeks.

Deutsche Bank strategists said their main concern was that significant debt monetisation would expand the monetary base, eventually feeding into faster credit growth, inflation, imports and a weaker rupiah.

"The risk is that, in conducting these operations in such large size, that people start to question what the exit policy to this will be," said Siddharth Mathur, head of APAC emerging markets research at BNP Paribas in Singapore.

As investors await details, Mathur expects "they will raise slightly the risk premium that they associate with Indonesia as a compensation for the uncertainty of what happens down the road".

It is a rare case of a government borrowing without paying interest to the central bank, which must then print money to ensure that borrowing is free and the budget deficit doesn't blow out.

Yields on rupiah bonds, more than 30% of which are held by foreigners, have so far held steady.

Analysts at Nomura Singapore said they remain neutral on Indonesian bonds after the announcement, and Deutsche said it would stay long bonds but shift to the five-year tenor.

The biggest investor concerns are however around the likely pressure on BI to cut interest rates to limit losses and whether that would compromise its policy responses to inflation.

June annual inflation was at a 20-year low of 1.96% as the virus outbreak suppressed demand. BI Governor Perry Warjiyo has said it would likely remain muted this year, while signalling there was space for lower rates even after the three cuts to 4.25% this year.

A BI document presented to parliament last week showed the central bank expected a 3.35% inflation rate this year as a result of debt monetisation, up from an initial forecast of 2.49%, and a further increase to between 4.88% and 6.69% in 2021.

Citi Indonesia economist Helmi Arman said he had expected one more 25 basis point cut before the scheme was announced, but there could be more as policymakers "may be more inclined to lower monetary policy costs".

Former Indonesian finance minister Chatib Basri told Reuters it was heartening that BI's participation in government financing was limited.

"If BI doesn't have a strong enough capital, it may be reluctant to raise rates even when the economic conditions warrant, for example, when inflation shoots." (Additional reporting by Maikel Jefriando Editing by Vidya Ranganathan and Jacqueline Wong)

Stocks mentioned in the article
ChangeLast1st jan.
BNP PARIBAS 0.90% 35.78 Real-time Quote.-32.88%
DEUTSCHE BANK AG -0.63% 7.777 Delayed Quote.13.24%
NOMURA CO., LTD. 3.26% 696 End-of-day quote.-52.16%
NOMURA HOLDINGS, INC. 2.72% 503 End-of-day quote.-10.72%
PT BANK MANDIRI (PERSERO) TBK -5.17% 5500 End-of-day quote.-28.34%
share with twitter share with LinkedIn share with facebook
Latest news "Economy & Forex"
07:16aNEWS HIGHLIGHTS : Top Financial Services News of the Day
DJ
07:16aNEWS HIGHLIGHTS : Top Company News of the Day
DJ
07:16aNEWS HIGHLIGHTS : Top Global Markets News of the Day
DJ
07:15aPittsburgh Electrical Insulation (PEI) Acquires Fibertek to Expand Manufacturing Capacity
SE
07:15aCoronavirus Stimulus Proposals Aren't Limited to Coronavirus Spending
DJ
07:10aFacilities Planning Services Group Creates Re-Shoring Team Plan to Help Re-establish Manufacturing in the USA
SE
07:05aZenTek Consultants Launches Training & Networking Hub for the Civil Engineering Industry
SE
07:02aClorox won't have enough disinfecting wipes until 2021, its CEO says
RE
07:00aMullen’s Miracles foundation announces the activation of its second stage to nourish the needs of those in crisis
SE
06:54aUK COVID lending to businesses tops 50 billion pounds
RE
Latest news "Economy & Forex"