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Bank Indonesia Becomes Largest Holder of Rupiah Bonds, Stabilizing Market Amid Global Uncertainty

Bank Indonesia becomes top holder of sovereign bonds, owning 23%, to stabilize rupiah and combat dollar strength.

By Athena Xu

5/16, 03:34 EDT

Key Takeaway

  • Bank Indonesia now owns 23% of total rupiah bonds, becoming the largest holder and surpassing local banks to stabilize the Indonesian rupiah.
  • BI's bond purchases, initially a pandemic response, now aim to curb market volatility and have attracted $230 million in foreign investments this month.
  • The Indonesian bond market's appeal is underscored by a 250 basis point yield spread over US Treasuries, amidst global anticipation for US CPI data.

Bank Indonesia's Strategic Bond Holdings

Bank Indonesia (BI) has significantly increased its stake in the nation's sovereign debt, now owning 23% of total rupiah bonds, surpassing local banks' holdings. This marks a substantial rise from less than 5% in early 2020, as per government data compiled by Bloomberg. The central bank's bond-buying initiative, initially a pandemic-era policy, has evolved into a crucial strategy to combat the dollar's strength and stabilize the Indonesian rupiah. In a move that surprised markets, BI raised interest rates in April and committed to supporting the rupiah beyond the 16,000-per-dollar threshold. This strategy aligns BI with other central banks, such as the Bank of Japan, known for being the largest holders of their respective countries' debts. Myrdal Gunarto, a strategist at Malayan Banking Bhd in Jakarta, views this development positively, stating, "Its status as the biggest holder of government bonds allows BI to curb volatility during an unfavorable global market environment."

Pandemic Tool to Market Stabilizer

Originally, BI's bond purchases aimed to cap government borrowing costs and stimulate economic growth during the pandemic, a policy also adopted by the Philippines. However, the focus has shifted towards using these purchases to stabilize bond yields and mitigate market volatility, especially during periods of speculation about the Federal Reserve's interest rate policies. This shift has proven effective, with foreign investors buying approximately $230 million worth of rupiah bonds this month, contributing to the currency's near 2% appreciation against the dollar. Additionally, yields on benchmark 10-year bonds have decreased by 31 basis points, reflecting improved sentiment towards emerging-market assets amid expectations of an earlier rate cut in the US.

Influences on Indonesian Bond Market

The Indonesian bond market is currently influenced by a mix of domestic and external factors. Internationally, the market's eyes are on the US Federal Reserve's interest rate decisions. Domestically, Indonesia is navigating challenges such as presidential leadership transition and a slowdown in exports, which could adversely affect the current account. The market's future direction may hinge on the Federal Reserve's easing cycle's commencement, which could rejuvenate investor interest in Indonesian bonds. The yield spread of Indonesian 5-year bonds over US Treasuries stands at approximately 250 basis points, highlighting the attractiveness of Indonesian yields amidst these uncertainties.

Global Market Anticipation for US CPI Data

The global financial markets are eagerly awaiting the upcoming US Consumer Price Index (CPI) report, with significant implications for stocks and bonds worldwide. Federal Reserve Chair Jerome Powell's commitment to maintaining the current rate has heightened this anticipation. Market reactions have been mixed, with a resurgence in meme stocks like GameStop and potential volatility in the copper market. Analyst Simon White has expressed skepticism towards the prevailing sentiment that 'bad news is good news,' pointing to the complex dynamics influencing global financial markets.

Street Views

  • Myrdal Gunarto, Malayan Banking Bhd (Bullish on Indonesia's bond market):

    "Its status as the biggest holder of government bonds allows BI to curb volatility during an unfavorable global market environment... We think that it’s a good development for Indonesia’s bond market."