By Mirza Baig 06-07-2020

Bank Indonesia To Monetize Debt

(2 min read)
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Indonesia’s finance minister and Bank Indonesia’s (BI) governor have announced a ‘burden sharing’ plan to fund part of the government’s fiscal stimulus.

The central bank will purchase about IDR397tn of government bonds at zero coupon rate and an additional IDR173tn in two other schemes at concessional rates. Altogether, the bond purchases will be worth about IDR570tn, or 4% of GDP.

To my knowledge, this is the first major EM economy to discuss monetizing fiscal deficit in the wake of the COVID-19 crisis. BI’s primary mandate is ‘rupiah stability’, though it can be unorthodox in its methods. Even before the monetization plan was announced, it was facing criticism for maintaining a two-tiered spot market, and overly optimistic assessment of fair value.

As such, the market’s sceptical reaction to the news is well warranted. IDR has depreciated by about 2% as the market digested the news. The bond market has remained stable.

While we await further clarity on these plans, consider the following.

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