Indonesia has responded boldly to the coronavirus. The government’s much-discussed plan to move the country’s capital from Jakarta to East Kalimantan has been scrapped. The 3% ceiling on the budget deficit, a crucial signal to foreign investors that successive governments are keen to keep national finances healthy, has also been temporarily dropped. The central bank and the finance ministry risked the wrath of foreign investors by agreeing to partial monetization of the debt.
It is certainly not the only country that has been forced to make difficult choices. Huge fiscal and monetary stimulus have been the norm. Governments across Asia, including Indonesia itself, have used severe containment measures to limit the spread of the virus, accepting the trade-off of serious economic disruption.
This helped ensure that Indonesia’s actions were applauded, rather than questioned, by international observers. Indonesia’s reputation as a wise and mature stakeholder in the international financial system – underpinned by the strong reputation of Finance Minister Sri Mulyani Indrawati – has remained intact.
This reputation also holds true for the country’s debt management office, which has proven to be one of the most active, flexible and mature sovereign debt teams in the world during the year 2020.
The country turned to the dollar bond market three times in the first half of the year, raising $ 9.8 billion, and sold a 100 billion yen ($ 943 million) Samurai bond in July. Its dollar deals included a $ 4.3 billion bond in April, which is still Asia’s closest to a sovereign ‘coronavirus bond’, though Indonesia halted just before restricting it. use of the proceeds to fight the pandemic.
When GlobalCapital Asia spoke to Luky Alfirman, director general of budget finance and risk management at the Indonesian finance ministry in early December, he was in a thoughtful mood. Alfirman has spent a lot of time reviewing funding decisions made in 2020, including the decision to issue a de facto coronavirus bond rather than a formal bond. But he also looked to the future, talking about the government’s funding plans for next year – and what he fears most from 2021.
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The full video is included above, but Alfirman’s answers to two of the many questions we asked are included below.
GlobalCapital: There has been talk that your $ 4.3 billion bond in April could be an official Covid-19 bond. In the end, it was sort of a hybrid – you decided not to get the official label and explicitly earmark the proceeds for Covid relief, but you made it clear to investors that the majority of the proceeds would be used. to combat the impact of the pandemic. What stopped you from going all the way and selling an official obligation to respond to Covid?
Luky Alfirman: We have to go back to really feel what we were facing at that time. In April, the Covid-19 pandemic had just started and everything was still very uncertain. We did not know about the vaccine at the time. We were still busy with [questions like], “How many fans do we need? Do we need to build new hospitals? Do we have enough hospital beds?
Faced with this uncertainty, at a time when the market is very volatile, timing is very important. And from a government perspective, we need two things. We need to be able to act quickly but at the same time flexibly. These two things are very, very important to decision-makers, especially in this kind of situation.
When we were preparing to enter the market, we had three options: label it as an official Covid-19 or pandemic bond, issue a regular bond, or maybe, depending on your terminology, issue a hybrid. [of the two]. We had the experience of issuing thematic bonds, with our global sukuk. Pandemic links require additional efforts, both in terms of preparedness and beyond; after delivery, we need to produce a report, eg.
In April, we had to make a decision. We were faced with uncertainty. How much money should be used for health? For the social safety net? How much should we allocate for medical equipment? Things were very fluid at the time. Things were very dynamic. We had to have flexibility. That’s why, after thinking it over carefully, we decided that it was much better for us to post something in between.
We issued a regular bond but we added a note [for investors], which was that the proceeds will be used to support the management of the Covid-19 crisis. We rely so heavily on our reputation. Indonesia has been a frequent issuer in the market. We maintain good communication with investors. This is our trump card and this is why, even without explicitly labeling it as a Covid-19 or pandemic obligation, we were convinced that the market response would be rather positive.
GC: Let’s talk about your plans for next year. Can you describe your funding objective, as well as the likely choice of currencies?
Luky Alfirman: Of course, the financing need for next year will be determined by the budgetary situation. The budget deficit for next year is set at 5.7% of GDP. It’s part of the government’s fiscal consolidation plan, but in the face of the pandemic, the budget still needs to be expansionary to provide some kind of counter-cyclical support to the economy. In terms of numbers, we are going from a deficit of 6.34% in 2020 to 5.7% next year, which is lower but maybe not that much.
Remember, we relaxed our budget deficit rule of 3% of GDP for only three years. In 2023, we must return to deficits of less than 3% of GDP. This is our commitment. But the way we make this transition has to be smooth.
The face amount of funding this year is roughly the same. The question is: how do you get this funding? First, we will use internal government resources. We have an accumulated cash surplus over previous years. We will use it.
Second, we will continue to work with our development partners. In 2020, we received nearly $ 6.9 billion in support from multilateral and bilateral development agencies, such as the World Bank, Asian Development Bank, AIIB, Islamic Development Bank, KfW in Germany, JICA in Japan, AfD in France. Next year is still a work in progress, but we hope that we will continue to gain strong support from our partners.
The third step is the issuance, which will be rupee and not rupee. For non-rupiah it will be pretty much the same [as 2020]. We will issue a global conventional bond in US dollars; a global sukuk in US dollars, part of which is in the form of a green sukuk; a samurai bond in Japanese yen; and a bond in euros. we explore [the idea of issuing] an SDG bond for conventional investors, rather than just in the form of a sukuk.
In the domestic market, we will issue both conventional bonds and sukuk. We are also working on retail bonds.
We will have the support of Bank Indonesia, who will continue to be our reserve buyer in the bond market every week.