Global trends: A teller counts rupiah banknotes in Jakarta. A recent global sell-off in long-term government bonds was attributed to domestic politics and fiscal trends in different countries. — Reuters
JAKARTA: Growing concern about debt levels in developed economies could see some bond investors look to emerging market issuances as an alternative, but in Indonesia, they will want answers about the new finance minister and the burden-sharing scheme with Bank Indonesia (BI).
Permata Bank chief economist Josua Pardede told The Jakarta Post that, “all in all”, investors view Indonesia’s bonds to be competitive with those of India, its traditional rival in the region, given the declining yield trend and attractive real yield.
“However, the direction of fiscal policy under the new finance minister is a key factor that might bring positive results, if the budget is managed with discipline but can be negative when it is considered to be weakening governance,” said Josua.
One of the country’s longest-serving finance ministers, Sri Mulyani Indrawati, perceived as a symbol of fiscal prudence and reassurance for investors, was replaced last week.
President Prabowo Subianto yesterday installed Purbaya Yudhi Sadewa as the new finance chief, and, within days, the new minister introduced a groundbreaking policy of shifting 200 trillion rupiah (US$12.1bil) of government deposits held in BI to commercial banks in a bid to spur lending and, ultimately, gross domestic product (GDP) growth.
Investors were closely watching the fiscal impact of the manoeuvre, which signalled “aggressive fiscal expansion”, Josua said, noting that, if the funds actually flowed into the productive sector, investors would have a positive view on the policy and therefore on Indonesian government bonds as well.
“If it’s perceived to be weakening fiscal discipline and only becomes a ‘support’ for corporations, the bonds’ risk premium may go up.
“Politically, the transition to Purbaya brings a new perception: more pro-growth, but investors want proof that fiscal discipline will be maintained,” said Josua.
Indonesia’s 10-year bond yield was 6.34% last Friday, which is down 65 basis points year-to-date and lower than India’s 6.48% for the 10-year tenor.
Bloomberg reported early on Sept 8 that investors favoured Indonesia’s bonds over India’s, as they were betting on stronger rate-cut prospects, fewer trade risks and better fiscal discipline, courtesy of Sri Mulyani.
However, the article was published a few hours before Prabowo announced his cabinet reshuffle that replaced Sri Mulyani, introducing a new factor for bond investors to weigh. India’s large foreign exchange reserves and long-term policy stability give it an advantage.
So, Indonesia’s advantage lies in the declining yield momentum and potential inflow, but investors remain wary about the direction of fiscal [policy] and [general] politics,” said Josua.
In sovereign debt markets, yields on long-term government bonds from major developed economies, including the United States, the United Kingdom, France, Germany and Japan, have been climbing lately, in some cases reaching multiyear or multi-decade highs.
This pattern, even as monetary policy has been easing, reflects significant stress and repricing.
A recent global sell-off in long-term government bonds was attributed to domestic politics and fiscal trends in different countries, causing investors to demand risk premiums.
High debt-to-GDP ratios and increased budget spending with no clear financing led to long-term fiscal concerns in certain countries, said Josua.
“Domestic politics can accelerate risk perception, but the root of market concerns lies more in long-term fiscal sustainability.
“Investors have reacted to the combination of both, not just one of them,” he said.
US-based credit rating agency Fitch downgraded France’s sovereign debt last Friday, warning that the country’s debt mountain would keep rising until 2027 unless urgent action was taken, AFP reported.
Concurrently, Andalas University economist Syafruddin Karimi said the sell-off had been triggered by politics, but the main trigger was still long-term fiscal concerns.
“Politics lights the fuse, fiscal [problems] are the fuel.”
Josua said the concerns about long-dated bonds from developed economies had not so far resulted in an inflow to Indonesia but had instead generated risk-off sentiment in the short term, as reflected in a declining share of non-resident ownership of Indonesian bonds.
He added that potential inflows could happen if the US Federal Reserve cut its benchmark interest rates over the coming months and if Indonesia managed to demonstrate fiscal discipline and keep the rupiah stable at around 16,400 rupiah to 16,500 rupiah per dollar.
Syafruddin said the sell-off would not result in investors running to Indonesian bonds, given that the archipelago had its own set of factors causing uncertainty, namely a new finance minister and the burden-sharing scheme with BI.
The burden-sharing scheme was first introduced during the coronavirus pandemic in 2020, under which BI was allowed to buy government bonds in the primary or secondary market but returned all or part of the interest it earned on the coupon.
The scheme was essentially a lifeline thrown to the state during the pandemic to allow for a selling spree as the government strove to keep economic activity going while the central bank was focused on stabilising the rupiah’s exchange value.
Initially introduced as a crisis response, the scheme remains in place today, long after the pandemic has ended.
BI has purchased 198 trillion rupiah worth of government bonds as of early September under the scheme to help finance government priority programmes.
Josua said the scheme was still “a sensitive issue” that could become “a double-edge sword,” which was good for a short-term solution but could “erode trust if it goes too far”.
He explained that, from investors’ viewpoint, the scheme could be positive “if it’s considered as a safety net” that will preserve market stability when volatility is high.
It could, however, become a negative factor if investors perceived it as a sign that the government was dependent on the central bank, which would “decrease fiscal discipline and cause a risk of debt monetisation”.
Syafruddin, likewise, said investors were waiting at a junction regarding the burden-sharing scheme, with one way leading to a positive bond perception and the other to a negative one.
Which way things would head would “determine the spread of government bonds going forward”. — The Jakarta Post/ANN
