Jakarta. Indonesia's central bank has bought $1.6 billion worth of government bonds in the primary market, underlining its commitment to remain active in it as the country faces a burgeoning state budget deficit due to the rising cost of Covid-19 mitigation efforts. 

Finance Minister Sri Mulyani Indrawati on Monday said the deficit might reach up to Rp 1,028.5 trillion ($69 billion) this year, or 6.27 percent of the country's gross domestic product (GDP) – the biggest in at least three decades.

Tax revenue is also expected to shrink as the government cuts corporate income taxes.

Meanwhile, the stimulus package to help the economy cope with a prolonged pandemic will increase state spending even more.

To counter the expanding deficit, Bank Indonesia (BI) Governor Perry Warjiyo said the central bank will buy more government bonds.

"We will help the government meet its fiscal financing obligations in the primary market – we won't leave it to the market," Perry said in a teleconference on Tuesday.

BI had signed an agreement with the Finance Ministry to buy the government bonds and until May 14 it had already bought Rp 22.8 trillion worth of the bonds from the primary market.

The central bank is buying the bonds straight from the government through non-competitive bidding. BI is allowed to buy up to 25 percent of the issuance target.

"As a non-competitive bidder, we are allowed to buy a maximum of 25 percent from the [issuance] target set by the government. For example, if the target is Rp 30 trillion, we could buy up to Rp 7.5 trillion," Perry said.

If the target is not reached, BI can then buy more of the bonds through a "greenshoe option," aka an extra auction. 

The last option is done through private placement.

Bond for Liquidity 

Perry has also encouraged banks in need of more liquidity to trade their bond holdings to the central bank in a repurchase agreement (repo).

According to BI's data, Indonesian banks' total bond holdings were valued at Rp 886 trillion as of May 14. 

The central bank's secondary reserve policy mandates a macroprudential liquidity buffer (PLM) of 6 percent of third-party funds.

"Therefore, out of the Rp 886 trillion, Rp 330.2 trillion provides liquidity for the banks. The remaining Rp 563.6 trillion can be repo-ed to BI," Perry said.

This facility is part of the government's National Economic Recovery program, which also promotes credit restructuring for small and medium enterprises (SMEs).

Having more liquidity would allow banks to help out SMEs by restructuring their loans.

If banks could make more use of the repo facility, Perry said it might make it less urgent for the government to make fund placement to banks.

"In our estimation, banks could get enough liquidity for the SME credit restructure from the repo deal. According to the National Economic Recovery program, the government would only fund banks if their bond holdings are closing in on 6 percent of their third-party funds," Perry said.

Since March, BI has been pumping more liquidity into the country's banking system through a series of quantitative easing policies.

Perry said the central bank had freed up a total of Rp 583.5 trillion in cash from local lenders' books by buying up their government bond holdings and lowering its minimum reserve requirement (GWM).

Interest Rate Steady as Foreign Inflows Return

Bank Indonesia also decided to keep its benchmark interest rate at 4.5 percent for the third straight month on Tuesday.

It has also kept its overnight deposit facility rate at 3.75 percent and its overnight lending facility rate at 5.25 percent. 

"The decision was made to keep exchange rate stable amid uncertainties in the global financial market," Perry said.

Indonesia saw a net foreign capital inflow of $4.1 billion from April to May 14, Perry said, following a $5.7 billion net outflow in the first quarter.

The rupiah has also strengthened by 9.9 percent over the same period. 

There is still room for more interest rate cuts this year thanks to consistently low inflationary pressures and the increasing need to boost economic growth, Perry also said.