Indonesian Government Considers to Release One-Month Treasury Notes

Photo by Finance Ministry

JAKARTA (TheInsiderStories) – The Indonesian government is considers to release one-month state treasury notes in 2018 to meet the short-term liquidity needs. Previously the International Monetary Fund proposed Indonesia examine the short-term treasury notes as a solution if the money market is volatile.

Director General of Financing and Risk Management of the Finance Ministry Robert Pakpahan told reporters on Monday (22/8), the issuance of short-term treasury notes may help the directorate general of treasury to manage the State Government cash-flow.

So far, the ministry issued Rupiah-denominated bond in the domestic market in the form of State bonds and Sukuk with a tenure of 2-30 years, also treasury notes and Shariah notes with a tenure of up to 12 months.

According to Finance Minister Sri Mulyani Indrawati, the projected deficit of 2.19 percent of the gross domestic product (GDP) in the draft of 2018’s State budget indicates that the Government is increasingly careful in designing the state budget so that Indonesia can avoid the debt crisis.

Furthermore, She explained, in 2018, debt financing amounted to Rp399.2 trillion, investment financing of 65.7 trillion for public service agency of Rp57.4 trillion, including for State Asset Management Agency and State Enterprises, loan financing to local state enterprises amounting to Rp6.7 trillion, guarantee liability of Rp1.1 trillion.

“If we compare with two countries such as Malaysia and Brazil, our debt ratio is relatively very low, still at 27-29 percent compared to Malaysia 56 percent and Brazil 78 percent,” She said.

The policy to slash the assumed budget deficit is also aimed at settling the issue of debts and primary balance, so that it will not increasingly burden the state budget, she remarked.

“With a lower budget deficit, we will be able to solve the issue of debts. Admittedly, we can not stop it suddenly. The primary balance will still exist, but it will be half as compared to that in 2017,” Sri Mulyani explained.

The target of the budget deficit, which is lower than that in 2016 and 2017, is expected to send a positive signal to the public that the trend of financing has increasingly become better, she pointed out. The budget deficit was recorded at 2.49 percent of the GDP in 2016 and at 2.67 percent of the GDP in 2017.

Bank Indonesia data showed, Indonesia’s foreign debt reached US$328.2 billion, up 2.4 percent year on year (y/y) but slower compared to 2.9 percent rise y/y in previous month (March). Debt of public sector grew 9.2 percent y/y to $167.9 billion, slower growth compared to 10 percent y/y in March 2017.
With this development, the external debt to gross domestic product (GDP) ratio at the end of first quarter (1Q) 2017 was relatively stable at 34 percent as at the end of Q4 2016, but decreased from 37 percent at the end of 1Q 2016.
BI views the development of external debt at the end of 1Q 2017 remains healthy but continues to be vigilant about the risks to the national economy. The Bank said it will persevere to monitor the development of external debt, particularly the private sector external debt, intended to give assurance that the external debt can play an optimal role in supporting development financing without incurring the risks that may affect macroeconomic stability.
Indonesian Government has issued Rp380.4 trillion domestic bond as of June 14, 2017, representing 55.5 percent of this year’s target worth of Rp684.8 trillion. Meanwhile the outstanding debt reached Rp3,667.4 trillion or nearly 27 percent of GDP as end of April.
Outstanding debt, includes all government infrastructure projects guarantee, to GDP ratio is below 33 percent, considerably conservative and relatively safe. While the maximum debt to GDP ratio is 60 percent as stipulated in Law No. 17 Year 2003 on State Finance.
Sri Mulyani has said the benchmark yields of SBN have declined around 4 basis points following the rating upgrade by S&P, helping to reduce debt exposure. The stronger rupiah would also reduce debt.
Meanwhile, Fitch Ratings believes that the Indonesian authorities’ recent initiatives to cut borrowing costs and support economic growth will not have immediate benefits for Indonesian non-financial corporate bond issuers although the moves are important for deepening the local debt market in the longer term.

Fitch believes the revival of the commercial paper market would help diversify instruments traded in Indonesia’s money market and benefit many local corporates as the notes could work as an alternative to banks’ credit lines. Bank loans remain the primary source of debt funding, accounting for 90 percent of total debt in 2016.

Five years after Fitch upgraded Indonesia to BBB- and hence paving the way for foreign inflows, outstanding bonds and Sukuk issued on the local exchange have grown by CAGR of 21 percent, exceeding banking loan growth of 19% and external funding growth of 10 percent.
In the first half of 2017, around Rp56.5 trillion was raised through corporate bonds and Sukuks in the local bond market by 29 companies compared with Rp46.7 trillion raised by 26 companies a year earlier.

The authorities have stepped in to boost demand including a 2016 regulation that requires insurance firms and pension funds to allocate at least 20 percent of their investment portfolio to bonds or Sukuk. However, the ability to tap the debt market is strongly influenced by the issuers’ credit quality profiles.

Fitch observes that the issuance of Indonesian corporate bonds and Sukuk has increased recently although the number of issuers is relatively unchanged. There were 111 companies with outstanding bonds/sukuk at the end of 2016 compared with 96 in 2011.

The authorities are also preparing the tools to enable Indonesian companies to issue local-currency corporate borrowings in global debt markets to help companies meet their funding needs while reducing vulnerabilities to exchange-rate fluctuations. Fitch views the plan positively as this would shift the currency risk from the issuers to foreign investors even though many Indonesian companies have successfully issued US dollar-denominated global bonds.

However, foreign investor appetite remains to be tested as they tend to be more conservative when investing in Indonesian corporate bonds because the secondary market is relatively illiquid. While foreign buyers account for about half of Indonesia’s equity market and hold a significant portion of Indonesia’s sovereign government bonds, they take up only 6 to 7 percent of the local bond market.

Otherwise, credit rating agency PEFINDO reported the yield curve up to mid-February 2017 for Indonesia’s bond market has been bullish, with short-medium term maturities showing a greater decline than longer-term maturities.

For a tenor of one to 10 years, the yield declined at an average of 37 bps, while for a tenor of 10-20 years, the decline was 13 bps. As of February 22, 2017, the benchmark yield closed at 7.539 percent, down by 37 bps. As of Feb. 22, the benchmark yield closed at 7.539 percent, down by 37 bps.

“We are of the view that liquidity in the domestic financial market has been relatively abundant in line with an improved fiscal budget balance, the tax amnesty program, and improved economic fundamentals. We also see that the foreign portfolio is still flowing into the bond market, in line with abundant liquidity in the global market,” PEFINDO said in their report.

(Written by Linda Silaen, Email: