Photo by Finance Ministry

JAKARTA (TheInsiderStories) – Ministry of Finance has officially issued Indonesia Retail Bonds (ORI014) to be offered to retail investors, starting from today and extending until Oct. 19, 2017, with a coupon rate of 5.85 percent per year and a three-year tenor.

Government has set a Rp20 Trillion (US$ 1.4 billion) target for the issuance. Retail bonds are special instruments that the state sells to individuals through a licensed agent, with a predetermined minimum volume. The minimum investment is Rp 5 million with the same multiples.

To offer ORI014, the government has assigned 19 sales agents, consisting of 18 banks and one securities firm. Sales agents also conduct road shows in 35 cities around the archipelago to promote the issuance, primarily in the eastern region of Indonesia, in areas such as Ambon and Jayapura.

Director General of Financing and Risk Management of the Ministry of Finance Robert Pakpahan explained, that the government is currently dealing with the lag of infrastructure spending in the State Budget, considering that infrastructure development in Indonesia is considerably behind the average of other countries in Asia.

“The government has continuously issued ORI as part of its strategy to empower domestic investors amid the growing flow of foreign investors in the government securities market,” said Pakpahan, Friday (29/9).

The small number of domestic retail investors is one of the reasons why the Indonesian financial market is highly vulnerable to global shocks.

For the record, foreign portfolio ownership of government bonds is increasing steadily. The foreign investor portion of government bonds has reached 46.54 percent (Rp793.47 trillion) of a total of Rp. 1,704.75 trillion.

When global turmoil inevitably arises, there emerges a serious risk of outflows rocking the country’s financial markets and weakening the Rupiah exchange rate as well as yields.

Coordinating Minister of Economics Darmin Nasution has repeatedly warned that Indonesia should be aware of the high number of foreign investors holding debt portfolios.

On the one hand, the keen interest of foreign investors indicates that they are optimistic about economic prospects in Indonesia. However, on the other hand, this gives rise to vulnerabilities, due to the above-mentioned risk of outflows in times of global panics. For this reason, the government continues its efforts to increase the number of domestic investors in Indonesian bonds.

Unfortunately, pumping the popularity of bonds among domestic investors – particularly retail investors – is still problematical for a number of reasons, most importantly being that Indonesians have little knowledge about or trust in such investment instruments as bonds.

Furthermore, retail investors are still highly concentrated in the western part of Indonesia, especially Jakarta (55 percent of the country’s total). In the eastern part of Indonesia this ratio is only 10 percent.

Nevertheless, Kiswoyo Adi Joe, an Analyst from Recapital Securities, has confirmed the issuance of ORI 014 by the government is still quite interesting, inasmuch as Indonesia’s debt rating has received an ‘investment grade’ rating. Therefore, the investment risk will be much smaller.

Indeed, Kiswoyo explained, with interest only at a level of 5.85 percent, these products are competitive with other investment instruments, such as bank deposits. However, with the decline in BI interest rates, banks are planning to lower the interest they offer on deposits.

Note also that there is a difference of target investors from other government bonds, which are in fact mostly absorbed by institutional investors.

Writing by Elisa Valenta, Email: elisa.valenta@theinsiderstories.com