JAKARTA (TheInsiderStories) - Moody’s Investor Service sees Indonesia’ burden-sharing scheme may risk the central bank’ credibility in the long run. Bank Indonesia (BI) has agreed to buy Rp574.59 trillion (US$40 billion) of government bonds this year and rebate most of the yield to help fund economic recovery.
Anushka Shah, Moody’s vice president, said the debt monetization measure posed no immediate threat to the nation’ sovereign rating in the short term but warned the policy might have implications on the central bank’s credibility, as well as its ability to ensure price stability.
“BI has over the years established a credible monetary policy framework, but there are still a few aspects of the burden-sharing mechanism that are unclear, particularly with regard to the exit strategy,” Shah said on Tuesday (07/08) quoted by Jakarta Post.
Concerns by credit rating companies appear muted though. S&P, which already has a negative outlook on Indonesia’ rating, said late last week it makes no distinction between the debt issued by the government, be it to the central bank or to commercial investors, in assessing its fiscal impact, according to Kim Eng Tan, a sovereign analyst.
S&P recently downgraded its outlook on Indonesia’ BBB rating, the second-lowest investment grade score, because of the expected fiscal deterioration brought about by COVID-19.
For Moody’s, what will influence its rating decision will be “the duration and other binding constraints under which the measures are extended,” Shah said. That “in turn would determine the scope and extent of their usage as a lever to increase fiscal expenditure beyond what is deemed necessary for economic recovery and rehabilitation,” she added. Indonesia is rated Baa2 at Moody’s, equivalent to S&P’ rating.
President Joko Widodo’ administration is seeking to borrow Rp1.65 quadrillion this year to fund a budget deficit of 6.34 percent of gross domestic product (GDP) and repay its debts. The cost of protecting Indonesia’ five-year dollar bonds, or credit-default swaps, slid 14 basis points last week, the most in a month.
The burden-sharing scheme will see the central bank buying Rp397.5 trillion in government bonds at a maximum coupon rate to correspond with BI’ benchmark interest rate of 4.25 percent to fund health care and social safety nets. The central bank will then return the yield to the government in full on the same day it is paid.
BI, together with the government, will also bear the debt costs of the government’ stimulus package for small and medium enterprises (SMEs) and large businesses, which is estimated to generate Rp177 trillion in debt. The scheme will be implemented only for this year and the bonds will be tradable, which will allow BI to use them for its monetary operations. The government expects to raise Rp900 trillion in this year’ second half, after raising Rp630.5 trillion in the first six months, to cover the state budget deficit.
BI Governor Perry Warjiyo said on Monday that although the burden-sharing scheme would affect the central bank’ balance sheet, it would not have any implications on the central bank’ monetary policy. He believes the scheme will have a small impact this year on inflation, which hit a 20-year low in June due to weak demand, while BI continues to assess the impact on future inflation and Rupiah exchange rate.
“Our capital is strong and it will not affect how BI conducts our monetary policy according to the framework that we have established for years,” he said, adding the central bank has intensified its quantitative easing operations in recent months to help cushion the economic slowdown and cut its main policy rate three times this year to support GDP, on top of four cuts in 2019.
Warjiyo at BI’ last policy review had flagged the potential for more cuts. the government expects Indonesia’ GDP to come in between a 0.1 percent contraction and a 1.0 percent expansion this year, compared with 5.0 percent growth in 2019.
US$1=Rp14,200
Written by Lexy Nantu, Email: lexynantu@theinsiderstories.com
