Indonesia wants foreigners to own less bonds in long run

Jakarta • Indonesia, rattled by a global emerging market (EM) sell-off, wants to halve the foreign ownership of its sovereign bonds in five years as the government seeks to shield its assets from external shocks.

The Finance Ministry is seeking to bring down the amount of government bonds owned by offshore funds to 20% from almost 38%, Scenaider Siahaan, director of debt portfolio and strategy at the ministry, said by phone on Tuesday. With foreign investors still jittery about putting their money into EMs, the government considers it as an ideal time to widen domestic ownership, he said.

Indonesia has been one of the hardest-hit Asian EMs because of its reliance on foreign inflows to finance its current-account and budget deficits. Offshore ownership of its bonds peaked at just under 42% in January before a sell-off triggered by rising US interest rates and a stronger dollar. Overseas investors held 845.8 trillion rupiah (RM238.26 billion) of Indonesian bonds as of Aug 20, according to Finance Ministry data.

The rupiah has weakened almost 7% against the dollar this year, forcing Bank Indonesia to hike interest rate four times since mid-May and step up intervention in the foreign-exchange market. That’s also spurred President Joko Widodo to order ministers to take long-term measures to tackle the current-account deficit.

“The finance minister wants to slash foreign ownership by half so that it will only reach around 20% within the next five years,” Siahaan said. “But we need to work hard to realise that because our market has yet to be deep enough. We need to deepen it first.”

For new bond issuance next year, the government plans to keep about 70% to 75% in local currency debt, Siahaan said. The earliest Indonesia can switch to only rupiah-denominated bonds will be 2023, he said.

Lowering a reliance on foreign funds won’t be easy as the local market isn’t deep enough to absorb such a large supply of securities, according to Myrdal Gunarto, an economist with PT Maybank Indonesia in Jakarta.

The government and the central bank must team up to counter any impact of such a step on the rupiah as well, he said.

“Domestic stakeholders such as the government, Bank Indonesia, pension funds, banks and local financial institutions must have enough liquidity to replace that foreign portion,” Gunarto said. “It will be hard work because there has to be money creation from domestic economic activities to ensure such a liquidity.”

The 10-year rupiah bond yield has rallied more than 150 basis points this year, reaching a 20-month high early this month. Foreign funds were net sellers of US$2.3 billion of local-currency bonds in the second quarter (2Q), the most since at least 2009, data compiled by Bloomberg show. They have since turned net buyers, purchasing about US$1 billion of the securities in the 3Q. — Bloomberg