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Jakarta Post

BI requires banks to buy govt bonds using $6.5b in excess liquidity

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Fri, April 17, 2020   /   07:15 pm
BI requires banks to buy govt bonds using $6.5b in excess liquidity Bank Indonesia Governor Perry Warjiyo (Courtesy of Bank Indonesia/-)

Bank Indonesia (BI) is requiring banks to buy government bonds after cutting banks’ reserve ratio further, providing the financial system with Rp 102 trillion (US$6.54 billion) in liquidity in a move that is expected to help the state fund the coronavirus battle.

BI Governor Perry Warjiyo said a recent central bank regulation to cut the rupiah reserve requirement ratio should be used by banks to buy new government bonds.

“This policy will fulfill three purposes simultaneously, including BI’s need to inject liquidity, while at the same time obliging banks to improve liquidity management by buying government bonds,” Perry told reporters. “This will help the government to finance the budget deficit.”

The government projects Indonesia’s state budget deficit to reach 5.07 percent this year, with an additional budget of Rp 405.1 trillion to be allocated for medical spending, the social safety net and business rescue packages.

BI decided on April 14 to lower the rupiah reserve requirement ratio by 200 basis points (bps) for conventional banks and 50 bps for sharia banks starting May 1. BI will also revoke the banks’ obligation to fulfill the intermediary macroprudential ratio (RIM). Both measures will boost bank liquidity by up to Rp 117.8 trillion.

“BI’s quantitative easing measures will boost liquidity by nearly Rp 420 trillion,” Perry said, citing the Rp 300 trillion in funds the central bank is injecting into financial markets and banks to mitigate the effects of COVID-19, including foreign investors’ selloff of Indonesian assets.

Perry said that, by requiring banks to buy new government debt papers, “this will reduce pressures to the bonds issuance”.

The government has nearly tripled its borrowing this year to Rp 1 quadrillion to finance the fight against COVID-19 through Presidential Regulation (Perpres) No. 54/2020 on the 2020 state budget revision, issued on April 3.

The government plans to offer sovereign debt papers worth Rp 549.6 trillion, an increase from the initial Rp 389.3 trillion, while also planning to raise Rp 450 trillion in “pandemic bonds”, given that demand for government bonds has significantly declined.

Under the new Perpres, the government allows the central bank to buy government debt papers directly during auction. The previous law only allowed BI to buy bonds in the secondary market.

Perry said BI would be prepared to buy government bonds in the primary market in two weeks, adding that it would buy bonds only as a last resort if the market could not fully absorb the bonds issuance.

“BI and the government are currently smoothing out the technicalities for the policy,” Perry said.