Bank Indonesia’s heavy bond buying to continue, analysts say

[JAKARTA] Indonesia’s central bank will buy as much as 200 trillion rupiah (S$15.7 billion) of government debt in the secondary market next year, according to analysts, keeping up a blistering pace of bond purchases that has helped soften the blow of heavy foreign selling.

The bond buying is designed to make sure that Bank Indonesia’s loose monetary policy has a clear impact on the economy by flooding banks with cash, the analysts said.

Although the central bank has cut rates by 1.25 percentage points this year, lending rates at commercial banks have so far declined at a much slower pace.

“The aim is clear: to address weak monetary transmission by reinforcing the pass-through of easing,” said Fesa Wibawa, an investment analyst at Aberdeen Group in Singapore. “There’s little chance of reversing its balance sheet expansion.”

The likelihood of more bond-buying is good news for local investors, who have flocked to the country’s debt market even as global funds flee.

Indonesia’s 10-year yield fell to its lowest level since late 2021 last week, despite more than US$480 million of net selling by foreign investors across all maturities so far this month, according to Bloomberg-compiled data.

The central bank’s bond purchases help limit the impact of this foreign selling on yields and also neutralise Bank Indonesia’s interventions in the currency market, which reduce the local supply of rupiah and so put upward pressure on yields, said Handy Yunianto, head of fixed income research at PT Mandiri Sekuritas.

Bank Indonesia had bought roughly 217 trillion rupiah of bonds by Sep 16, more than double the amount it bought last year, according to its own data.

DBS Bank and Mandiri Sekuritas expect next year’s bond purchases to roughly match the amount from this year. Citigroup and BNY predict the figure will lie somewhere between 150 trillion and 200 trillion rupiah. Aberdeen thinks the amount could even rise next year.

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Still, that may not be enough to keep yields in check. Indonesia’s 10-year yield may stay low for now but it will climb to 6.75 per cent over the next year, said Audrey Ong, FX and emerging-market macro strategist at Barclays. The country’s bonds already look expensive and they will also face pressure from talk around fiscal policy, she said.

Indonesia’s 10-year bonds closed at a bid yield of 6.10 per cent on Friday, down around two basis points.

Going all-out

When Bank Indonesia made its last rate cut on Sep 17, it said bank lending rates had fallen just seven basis points to 9.13 per cent in the first eight months of this year. It had cut rates by a percentage point during the same period.

The disconnect between base rates and the bank lending rates that most citizens actually face explains the bond buying, analysts say.

It can take months or even longer for banks to pass on lower rates to their customers, in part because they have to weigh up other factors, such as broader economic conditions and their own costs of capital. Bank Indonesia said in its September briefing that the lagging transmission was mainly due to special rates offered by banks to large depositors.

By buying bonds in the open market, Bank Indonesia not only puts pressure on bond yields but also puts money into the hands of banks, giving them more cash to lend elsewhere.

Banks own around 22 per cent of all government bonds in the country, according to finance ministry data. The central bank owns around 24 per cent, while non-bank institutions such as pension funds and insurers own another 22 per cent. Foreigners hold 14 per cent.

Last month, Bank Indonesia said that it was reviving a “burden sharing” programme previously used during the Covid era, pledging to share some bond interest to help fund the government’s priority programmes.

That move fuelled concerns that the central bank was losing its independence, a worry that has been inflamed by its promise to go “all-out” to support growth.

Its presence in the bond market has already helped reduce the impact of foreign selling.

The local currency bond market saw the worst period of foreign selling in more than three years in September, after protests, spending pledges and the ouster of well-respected finance minister Sri Mulyani Indrawati. The benchmark 10-year yield, however, barely moved last month. BLOOMBERG