INVESTORS in Indonesia are growing increasingly wary about potential stress in the nation’s bond markets as the central bank ramps up debt holdings to record levels.
Bank Indonesia now owns about 25 per cent of the country’s outstanding bonds, up from just 5 per cent before the pandemic, amid a buying binge driven by its efforts to protect the rupiah. Central banks routinely buy government debt to suppress yields and bolster growth, but the scale of Bank Indonesia’s purchases are reminiscent of those made by the Bank of Japan (BOJ) that eventually drained the life out of the debt market.
Bank Indonesia’s rupiah bond holdings are likely to rise towards 30 per cent of the nation’s outstanding debt due to its quantitative-easing programme, said Asti Raniasari, head of the multi-asset investment team at BRI Manajemen Investasi in Jakarta.
“I still see quantitative easing next year,” Raniasari said. The central bank will need to support markets as the rupiah weakens, but also an economy that’s suffering a bout of deflation and soft growth, she said.
Bank Indonesia has snapped up 461 trillion rupiah (S$38.7 billion) of the nation’s sovereign debt this year, raising its total holdings to an all-time high of 1,557 trillion rupiah, according to data compiled by Bloomberg. The central bank has agreed with the finance ministry to purchase an additional 150 trillion rupiah of bonds in the secondary market in 2025 as part of its monetary operations, governor Perry Warjiyo said this month.
Bank Indonesia’s purchases have helped narrow the extra yield on the nation’s 10-year bonds over similar-maturity Treasuries to about 246 basis points from as high as 277 basis points on Dec 6. Demand for the nation’s debt at primary auctions has dropped to the lowest level in more than a year, according to data compiled by Bloomberg.
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If the central bank does boost ownership of the bond market to 30 per cent and that persists for a long time, “it can reduce liquidity in the secondary market”, said Adra Wijasena, a senior research analyst at Shinhan Sekuritas Indonesia in Jakarta. “Furthermore, if the bond buying is done by printing money, it could lead to inflation.”
Bank Indonesia initially boosted purchases of government debt during the Covid years in an extraordinary measure to help fund the state budget. The monetary authority is continuing those purchases mainly in the secondary market in an effort to stabilise yields and the rupiah amid an era of rampant US dollar gains.
The central bank is also under pressure to boost bond purchases as the government increases issuance to underpin its stimulus spending, and also to refinance debt originally sold during the pandemic. Investors and analysts have long debated how the central bank will be able to unwind its holdings without unsettling the bond market.
The BOJ’s share of the Japanese bond market exceeded 30 per cent in September 2015, about a year after it boosted its debt-purchase programme. A measure of the nation’s perceived bond-market functioning slumped over the following two years.
At least some money managers feel Bank Indonesia’s purchases are beneficial as they help contain volatility.
“It’s actually more helpful for them to be in the market because a lot of investors might feel that they are there to help contain volatility,” said Leonard Kwan, a portfolio manager at T Rowe Price in Hong Kong. “When you have the Bank Indonesia there helping to contain volatility, it offers a little bit more confidence to market makers to be active providing prices and liquidity.” BLOOMBERG
