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To prevent market disruption from bond sales during the QE era, the Indonesian central bank has stated

Image: Reuters Berita 24 English - After analysts warned the move may ignite debt outflows and complicate a deal with fiscal authorities, In...

Image: Reuters

Berita 24 English - After analysts warned the move may ignite debt outflows and complicate a deal with fiscal authorities, Indonesia's central bank said a plan to sell billions of dollars' worth of bonds purchased during the outbreak would be performed cautiously.

In a conference call with investors on Thursday, Bank Indonesia (BI) Governor Perry Warjiyo stated that BI had sold bonds for around 1.1 trillion rupiah ($73.41 million) early last week and planned to sell about 70 trillion rupiah in bonds with maturities of five years or less. He didn't give a deadline.

According to him, the goal of the policy was to absorb surplus market liquidity while also raising bond yields to make Indonesian assets more appealing during a period of global monetary tightening.

While delaying raising interest rates from pandemic-era levels, which has made it one of the least hawkish central banks in the world, Deputy Governor Dody Budi Waluyo told Reuters on Friday that the decision should be seen as "a stronger signal" that BI wanted to mitigate inflation and exchange rate risks.

In a phone message, he stated that "BI of course will ensure that liquidity in the economy stays adequate to support the economic recovery and we have done a rigorous assessment," adding that the quantity of bonds sold will depend on market dynamics.

As of July 20, BI had bonds worth 1,263.27 trillion rupiah ($84.30 billion), up from 273.21 trillion rupiah at the end of 2019 when quantitative easing was implemented to boost the pandemic-affected economy.

According to Handy Yunianto, a fixed income analyst at Bank Mandiri, "increasing bond rates can attract new investors since they will create an appealing entry level, but they might also accelerate the sell-off from existing investors."

A large bond offering might be "a double-edged sword" for Indonesia's debt market, according to Nomura analysts, given the country's weak interest in investing in emerging countries and the local banks' diminishing demand as domestic credit growth accelerates.

The proposal is further complicated by the fact that BI and the finance ministry still need to come to an agreement for BI to purchase 224 trillion rupiah's worth of low-interest bonds this year.

In recent months, demand at government bond auctions has been sluggish; if it declines further, BI may be compelled to purchase more bonds this year in its capacity as a standby buyer rather than sell, according to Mandiri's Yunianto.

Requests for feedback from representatives of the debt office inside the finance ministry went unanswered. In order to combat the worldwide trend of rising interest rates, Indonesia will attempt to reduce its objective for issuing bonds, according to Finance Minister Sri Mulyani Indrawati.

In addition to its quantitative easing during the epidemic, BI decreased its key policy rate by a total of 150 basis points (bps) to 3.5 percent.

In addition to the bond offering, BI has stated that it will also increase money market interest rates, a move that some analysts believe to be a prelude to an increase in the policy rate.

Helmi Arman, the head of Citi's Indonesian operations, anticipates three rate increases of 25 basis points by BI beginning in September and sees the proposed bond sale as more of a showpiece.

He predicted BI's bond holdings will still increase in 2022, but the bond sale strategy will limit the net purchase. "Aggressive selling by BI could induce unnecessary bond supply risk perceptions and hence adversely affect portfolio flows," he added.

(1 USD = 14,985,00 Rp)

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