Bank Indonesia emerges as largest holder of sovereign bonds

INDONESIA’S central bank has joined an exclusive club: the biggest owners of their nation’s sovereign debt.

Bank Indonesia’s (BI) ownership of rupiah bonds accounted for 23 per cent of the total this week, overtaking local banks’ holdings as authorities increased their purchases to stabilise the currency. BI’s share was less than 5 per cent in early 2020, according to government data compiled by Bloomberg.

A pandemic-era policy, bond buying has now become a major tool for Indonesia as the nation fights back against the dollar’s dominance this year. BI surprised markets with an interest-rate hike in April, and pledged to sustain efforts to boost the rupiah past the 16,000-per-dollar level.

The central bank joins the likes of Bank of Japan, which is the largest holder of its nation’s debt.

“Its status as the biggest holder of government bonds allows BI to curb volatility during an unfavorable global market environment,” said Myrdal Gunarto, a strategist at Malayan Banking in Jakarta. “We think that it’s a good development for Indonesia’s bond market.”

BI initially ramped up its purchase of local bonds to cap government borrowing costs during the pandemic and spur economic growth, similar to peers in the Philippines. But the policy is now mainly used to stabilise bond yields to prevent outflows during market volatility, such as the period last month when Asian currencies were rocked by speculation the Federal Reserve will delay rate cuts.

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Those policies appear to be working. Foreign investors have bought about US$230 million worth of rupiah bonds this month, aiding the currency’s near 2 per cent gain against the greenback. Yields on benchmark 10-year bonds have dropped 31 basis points as sentiment toward emerging-market assets improved following inflation data that brought back bets for an earlier rate cut in the US.

BI also recently boosted issuance of rupiah securities at high yields in an effort to attract foreign flows. The central bank then uses rupiah bonds as collateral for the securities. BLOOMBERG