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Indonesia debt plan set for scrutiny as S&P sees no rating risk

[JAKARTA] An influential panel of Indonesian lawmakers is set to scrutinise the government's plan to sell billions of dollars of bonds to the central bank to finance a widening fiscal deficit, which S&P Global Ratings said posed no immediate threat to the nation's sovereign rating.

The Parliament's Commission XI, which has oversight of the finance ministry and the central bank, will hold a hearing with Finance Minister Sri Mulyani Indrawati on the so-called burden-sharing plan on Monday from 10am in Jakarta.

The government is pushing the central bank to share more of the burden of funding the nation's response to the Covid-19 pandemic, proposing that Bank Indonesia buy bonds worth 574.4 trillion rupiah (S$55.03 billion) to help finance the fiscal deficit. The currency tumbled 2.1 per cent last week on concern the plan will weaken the central bank's independence and trigger rating downgrades.

Concerns by credit rating companies appear muted though. S&P, which already has a negative outlook on Indonesia's 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 Tan Kim Eng, a sovereign analyst.

Moody's Investor Service said separately that inflation is well-anchored in Indonesia and the credit outlook would depend on debt duration and other constraints.

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"Unless there are material and unforeseen economic or financial disruptions, we do not believe that this plan will affect the credit metrics more than we currently expect," Mr Tan said Friday.

S&P recently downgraded its outlook on Indonesia's BBB rating, the second-lowest investment grade score, because of the expected fiscal deterioration brought about by Covid-19.

President Joko Widodo's administration is seeking to borrow 1.65 quadrillion rupiah this year to fund a budget deficit of 6.34 per cent of gross domestic product and repay its debts. The cost of protecting Indonesia's five-year dollar bonds, or credit-default swaps, slid 14 basis points last week, the most in a month.

The burden-sharing plan is under "tough discussion" by the government and Bank Indonesia to ensure a prudent plan that maintains both monetary independence and fiscal integrity, a senior Finance Ministry official said Friday.

While some economists have argued the deficit funding may affect inflation and money supply in the long run, S&P's Mr Tan said the size of the programme wasn't large enough to materially affect monetary operations.

INFLATION IMPACT

"The impact of inflation, which recently fell below 2 per cent, will depend partly on how much Bank Indonesia (BI) offsets the liquidity impact of its bond purchases," Mr Tan said in response to questions. "This is no different from the situation that the bank faces in its ordinary course of monetary operations."

For Moody's, what will influence its rating decision will be "the duration and other binding constraints under which the measures are extended", Anushka Shah, a senior analyst in Singapore, 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 said.

Indonesia is rated Baa2 at Moody's, equivalent to S&P's rating.

While the stimulus measures announced by Indonesia's government will have some effect on fiscal and debt metrics, the impact will not be markedly different from the likely deterioration in other regions, Ms Shah said. South-east Asia's largest economy entered the crisis with comparatively strong fiscal buffers, providing it some fiscal space to react, she said.

"Like many emerging markets globally, BI's move towards unconventional quantitative easing represents one way for the government to fund its wider borrowing requirements in the wake of higher coronavirus-related spending and stimulus measures," Ms Shah said. "For systems like Indonesia where inflation is well-anchored by a generally credible monetary policy framework, such measures will alleviate the impact on debt affordability by limiting interest costs."

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