Bank Indonesia (BI) and the finance ministry “will increase the attractiveness of yields” on Indonesian assets “so that portfolio inflows return” to the country, Governor Perry Warjiyo told a press conference at parliament building.
Southeast Asia’s largest economy has been hit by heavy capital outflows this year, with the stock market plunging more than 30% and the rupiah sinking amid investor concerns over President Prabowo Subianto’s big spending plans, even as fuel subsidies ballooned due to the Iran war.
Foreign holdings of Indonesian bonds have slumped to a near two-decade low.
Markets are also worried about the autonomy of the central bank, transparency issues at the stock market and Prabowo’s new plan to centralize exports of major commodities.
BI has stepped up its currency interventions to defend the rupiah in foreign exchange markets, operations it has paired with purchases of long-dated government bonds in the secondary market to manage liquidity.
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A general view of the skyline of Jakarta, the capital city of Indonesia, Aug. 5, 2021. Photo by Reuters |
The central bank’s bond buying operations typically also aim to try to manage the government’s borrowing costs by preventing yields of long-term bonds from rising too much. The finance ministry had last month launched its own bond market operations, temporarily buying back bonds to keep yields from rising.
It was unclear what impact Saturday’s agreement between the finance ministry with BI would have on monetary operations or the finance ministry’s bond auctions.
One-year BI bonds, called SRBI, were sold at a 7.25% weighted average yield at an auction on Friday, higher than the government’s 10-year bond yield of 6.902%.
To help the government manage its interest expenses, Warjiyo said the central bank will raise the rate it pays for cash the government keeps at BI, adding this should ease any concern credit rating agencies may have.
Finance Minister Purbaya Yudhi Sadewa told the conference, which was also attended by Prabowo’s spokesperson and deputy speaker of parliament, that he hoped this synergy between fiscal and monetary authorities would improve investor trust.
Indonesia’s central bank raised its policy interest rates by a larger-than-expected 50 basis points at a policy review in May to support the rupiah.