Indonesia’s revised 2020 state budget highlights lower income and higher spending against the backdrop of the coronavirus outbreak. In addressing the widening deficit, the government is resorting to tripling the nation's debt to Rp 1 quadrillion (US$63 billion) as tax revenue is expected to slide with businesses paralyzed and households losing income during the pandemic.

The budget revision is stipulated in Presidential Regulation (Perpres) No. 54/2020 on the 2020 state budget changes, signed by President Joko “Jokowi” Widodo on April 3. State spending is expected to increase by nearly 3 percent to Rp 2.6 quadrillion while revenue is seen slumping by 21 percent to Rp 1.7 quadrillion.

Read also: Indonesia announces Rp 405 trillion COVID-19 budget, anticipates 5% deficit in historic move

With an Rp 852 trillion budget deficit, nearly triple the initial plan, the government will prioritize the use of accumulated cash surplus (SAL) worth Rp 70 trillion and the endowment fund for education worth Rp 60 trillion. The deficit is equivalent to 5.07 percent of gross domestic product (GDP), compared with 1.76 percent in the initial budget.

“The government’s first line of financing will come from an endowment fund and accumulated cash surplus but it will not be enough,” Finance Minister Sri Mulyani Indrawati told the House of Representatives Commission XI overseeing financial affairs in a video conference.

“Therefore, we need to issue government debt papers to look for the best financing sources. We will be very careful in navigating these uncharted waters.”

Consequently, debt issuances have tripled to Rp 1 quadrillion in the revised 2020 state budget, consisting of new Rp 449 trillion pandemic bonds and Rp 549 trillion government debt papers.

Pandemic bonds

The government will issue Rp 449 trillion worth of the so-called pandemic bonds to finance the country’s efforts to combat the health crisis and economic turmoil caused by the COVID-19 pandemic.

The purchase of the pandemic bonds is likely to be dominated by Bank Indonesia (BI), which under a new regulation is now allowed to buy government bonds at auction if the market is unable to fulfill the government’s financing target.

The stipulation in the new Government Regulation in Lieu of Law (Perppu) No. 1/2020, issued March 31, revokes a 1999 law on the central bank, which only allowed BI to buy government bonds in the secondary market.

“It is likely that, during this period, the ownership structure of government securities will change to some extent with foreign investors’ lowering their holdings considerably and BI seen to expand its balance sheet,” according to a research note by Fitch Solutions’ country risk and industry research team.

Yields on the benchmark 10-year government bonds rose to 8.322 on March 8, the highest in 1.5 years, indicating higher risks of investment perceived by investors in the bond market. Yields move in the opposite direction of prices.

Foreign investors had sold Rp 148.76 trillion (US$9.04 billion) in Indonesian assets as per April 1, including Rp 135.08 trillion in government bonds and Rp 9.71 trillion in Indonesian shares, BI data shows.

“The financing of pandemic bonds may be dominated by the central bank as foreign investors tend to avoid risky assets,” Bank Permata economist Josua Pardede said. “We expect that this will speed up the recovery of economic sectors affected by the COVID-19 pandemic.”

The timeframe, indicative yield and other details surrounding the pandemic bonds remain unclear.

Asia’s first 50-year dollar bond

The government has also increased the target of issuance for Indonesia’s regular government debt papers to reach Rp 549 trillion, from the initial Rp 389 trillion target, to finance the nation’s COVID-19 battle.

On April 6, the government surprised markets with the issuance of Asia’s longest-tenure dollar debt papers at 50 years to help aid the government’s fight against the coronavirus. Indonesia raised a total of $4.3 billion during the offering, consisting of $1 billion for 50-year maturities and $1.65 billion each for the 10.5 year and 30.5 year tranches, Reuters reported.

“Against the backdrop of global financial market turbulence, this is the biggest issuance of US dollar bonds in the Indonesian government’s history,” Sri Mulyani said. “We make use of the 50-year tenure because global investors’ preference for longer tenure bonds is quite strong.”

An aerial view of Mega Kuningan business district in South Jakarta. (kompas.com/Hilda B Alexander)

The longer the tenure the higher the yields, therefore more attractive for investors, said Center of Reform on Economics (CORE) Indonesia research director Piter Abdullah.

“A 50-year global bond is meant to provide buyers with incentives as their investment appetite has significantly declined amid the global uncertainties caused by the virus,” Piter said.

Economists are expecting that despite a significant jump in the government’s debt issuances, the debt-to-gross domestic product (GDP) ratio will not surpass the 60 percent legal ceiling.

“We expect the debt-to-GDP ratio to increase to around 34 to 35 percent this year, from last year’s figure of 29.8 percent,” Josua said.

$7 billion loan

Indonesia will receive around $7 billion in loans from the World Bank, Asian Development Bank (ADB) and Asian Infrastructure Investment Bank (AIIB) to finance the country's fight against COVID-19. The amount is equivalent to Rp 111 trillion as stipulated in the revised 2020 state budget, more than double the initial budget of Rp 48 trillion.

BI Governor Perry Warjiyo has said that the funds will be used to finance the country’s widening budget to prevent a greater health crisis and economic meltdown from the COVID-19 outbreak.

“The AIIB, ADB and the World Bank planned on around $7 billion [in loans] during an investor teleconference. We will maximize it,” Perry told House of Representatives Commission XI overseeing financial affairs. “The Finance Ministry has also said that it will maximize the government’s budget.”

Debt burden heightens risk

Economists agreed that Indonesia’s financing scheme to fight COVID-19 increased the debt burden and risks of repayment in the longer run, although they all have faith in the government’s fiscal discipline.

Jokowi has pledged to bring Indonesia’s state budget to its normal state by 2023 by bringing back the budget deficit cap of 3 percent of GDP. During the three years of recovery, Sri Mulyani said the government would ensure transparency to maintain budget credibility.

“We will be very transparent so as to maintain the credibility of our fiscal and monetary policies,” she said.

Fitch Solutions was of the view that, if the rupiah continued to depreciate rapidly as BI extends its government bond holdings, the Indonesian economy could enter a sovereign debt crisis, as the central bank bled foreign reserves.

“For now, this is not our core view, as we expect the recovery off the back of the COVID-19 outbreak to be robust,” Fitch wrote. “Moreover, Finance Minister Sri Mulyani has a good track record of fiscal discipline, and it is likely that, once the worst is over, she will ramp up efforts to bring government spending back in line and broaden the revenue base.”