Evolving Crisis: Bank Indonesia's Massive Injection

In light of the global unprecedented economic fiasco, Indonesia's central bank has planned $40 billion to the national budget, the most extensive debt monetization program among all emerging-market nations. Indonesia’s central bank, Bank Indonesia, has already been buying bonds directly from the government at auctions. They are now arranging to go one step further by acquiring a pre-determined amount of assets at zero interest or below the market rate. Additionally, it has been a recurring trend nowadays, where governments borrow vast amounts of money and turn to their central banks to finance the extra debt. However, directly monetizing the deficit has long been taboo, especially for emerging markets, and raises potential risks of inflation and questions the central bank's independence. According to the proposals, Bank Indonesia would finance 574.4 trillion rupiah to fund health care, social safety nets, and food security programs, and partially finance the cost of rescuing micro-, small- and medium-sized businesses. Nevertheless, the market reaction has been muted so far. Although the bulk of the bonds are likely to be long tenure bonds, the yield on benchmark 10-year government bonds has hovered around 7.2% for much of June. Foreign investors have been net buyers of $523 million bonds through June 26, set for a third straight month of inflows. The rupiah gained more than 2% against the dollar last month to complete the biggest quarterly advance since 2009, according to data compiled by Bloomberg. Furthermore, positive sentiments of recent government policy announcements have boosted the IDX Composite as well, rising from a level of 4.870 in Wednesday to almost reaching 5.000 this Friday.

On the fiscal aspect, Indonesia's policymakers and regulators are aiming to boost government spending to improve current economic position. On Friday (6/24), the nation's expenditure was projected to rise to a staggering record of 2,739.2 trillion rupiah ($193 billion), up from 2,613.8 trillion rupiah estimated at the end of March as the largest economy in Southeast Asia. On the other hand, the state revenue had fallen from 1,760.9 trillion rupiah to 1,699.9 trillion rupiah. As the pandemic has shown no marks of slowing down, the economic recovery has unsurprisingly been predicted to take its time as well, according to Ahmad Nazmi Idrus -- an economist at RHB Investment Bank. He added by stating, "High uncertainties remain due to the rising number of Covid-19 cases. This could force the government to maintain some form of restrictions, further suppressing growth," on Friday (24/6). In the implementation, the realization of the budget is highly concerned. From 75 trillion rupiah that had been budgeted for the health matters, only 1.53 percent of it had been distributed. Jokowi himself ordered the simplification of the bureaucratical procedure to help the budget distributed quickly and pushed all the ministries to react in an "extraordinary" manner to help the economy recover.

Amidst the pandemic, Indonesia’s growing need to increase its national budget is met with the underlying problem of decreased national revenue. This situation is assumed to be counteracted by the construction in Kalimantan set to be continued. By developing a new capital city, a stimulus is expected to deliver a multiplier effect on the economy during these times. Indonesia’s Minister of Planned Development, Suharto Monoarfa, said that “The capital project can create a lot of jobs and will have broad multiplier effects”. There is also good news that Abu Dhabi Crown Prince, Mohammed Bin Zayed Al Nahyan, founder and CEO of SoftBank Group Corp., Masayoshi Son and the US International Development Finance Corporation are interested in investing in this new capital city. Nevertheless, on the other hand, constraints in the construction of this capital city are due to the lack of connectivity between islands, and densely populated areas are found mainly in Sumatra and Java. Since the pandemic remains to be the main focus of the government, this plan will continue to be prioritized for the up and coming years. In conclusion, the objective of the increase in the national budget is to help speed up the process of recovery from the effects of the pandemic.

Sources:

The Jakarta Post

Kompas

BBC

Bloomberg

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