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Indonesian govt calms worries over foreign debts as rupiah weakens
Publication Date : 27-08-2013
The government is trying to calm the debt market, reassuring it that it has sufficient funds at its disposal to pay its dollar debts, as the local currency continues to weaken against the US dollar.
Investors are concerned that the increasingly weak rupiah together with the sharp spike in bond yields will swell the government’s debt payments and place a heavy burden on its coffers.
They say any further pressure on the state’s funds may cause the state budget deficit to breach the threshold of 3 per cent of gross domestic product (GDP), which would violate the law.
The government set a limit of 2.38 per cent on the deficit in the revised 2013 state budget.
But any surge of debt payments stemming from the ongoing developments in the financial market was still well within the government’s estimates, according to Scenaider CH Siahaan, the Finance Ministry’s director for strategy and debt portfolio.
“We are still safe citing what we have in our cash deposits,” he told reporters on Monday, without disclosing how long the government could cover its dollar debts with its current cash deposits.
Borrowing costs in Indonesia had been on a downward trend over the past few years, thanks to its sound macroeconomic fundamentals. But the government may have to pay more for its debts in the future, mainly due to an increasing volatility in the external environment that has exerted pressure on the rupiah and bond yields.
Last week, Bloomberg data showed that the rupiah tumbled 4.2 per cent to trade at 10,840 per US dollar its worst five-day performance since November 2008 while yields for the government’s 10-year bonds soared 22 basis points to 8.41 per cent, after officials from the US central bank confirmed that they were “comfortable” with the plan to taper its monetary stimulus next month.
The US monetary stimulus, known as quantitative easing, has pumped fund inflows into the global economy, leading to a rally in the bond markets that has allowed emerging economies, including Indonesia, to borrow funds with low interest rates.
“We took advantage of low yields that we enjoyed early this year, during which we already paid at least 60 per cent of [our annual debt liability],” said Scenaider, adding that the government would only have to pay the remaining 40 per cent in the second half of this year.
The government aims to raise 8 trillion rupiah (US$736 million) in its bond auction on Tuesday, during which the government is expected to tolerate high yields due to the US’ planned tapering of quantitative easing.
On Monday, the yield for 10-year government bonds due in May 2023 rose seven basis points to 8.5 per cent, prices from the Inter Dealer Market Association showed. It has surged 67 basis points since earlier this month, and 331 basis points since the beginning of the year.
Higher bond yields would cost the government more when it wants to borrow funds from the fixed income market or when it pays its debt liabilities.
Finance Minister Chatib Basri said there would be a safe liquidity cushion called the deferred drawdown option (DDO) available at “extraordinary” times if government bonds soared too high or Indonesia had difficulties in paying its debts.
“This scheme offers Indonesia an opportunity to access funds that come with cheaper interest rates, in cooperation with countries such as Japan, Australia and others,” the minister said Monday in a phone interview.
Deputy Finance Minister Mahendra Siregar said separately that the government was now studying the requirements needed to apply for such standby loans, although he claimed that Indonesia had so far no need to apply for them.
Among the standby loans that Indonesia can access is the Chiang Mai initiative, which is aimed at addressing balance of payment and short-term liquidity difficulties in the region, and offers loans of up to $120 billion.