JAKARTA - Indonesia's finance minister said on Monday the government may sell low-yielding bonds to the central bank via private placement to help finance a ballooning fiscal deficit caused by spending to tackle COVID-19.
The fiscal deficit is expected to be 6.34% of gross domestic product (GDP), or three times what was initially forecast for this year, fanning concern about the burden of paying interest on new debt over the next decade.
Earlier this month, lawmakers pressured Bank Indonesia (BI) to purchase bonds with coupons below market rates to help Southeast Asia's largest economy avoid a recession.
In a parliamentary hearing on Monday, Finance Minister Sri Mulyani Indrawati put forward two schemes being discussed.
Under the first, BI would bear up to 100% of the interest burden on funds used for government programmes considered of public interest, effectively meaning BI could buy bonds carrying no coupon.
She identified such programmes as health, social protection and support for regional budgets, in total amounting to 397 trillion rupiah ($28 billion).
Under a second scheme targeting businesses, BI may purchase bonds carrying a coupon of as low as one percentage point below its benchmark rate to help fund programmes totalling 505 trillion rupiah, Indrawati said.
BI's benchmark 7-day reverse repurchase rate is currently 4.25%.
Both schemes may reduce the government's interest expenses by 53.9%-54.8%, assuming its 10-year bond yield was 7.36%, Indrawati said.
"We are now finalising the calculation for these components, including how much we are going to issue to the market and how much we will issue in private placement with BI," she said.
BI Governor Perry Warjiyo, who also attended the hearing, reiterated that BI was ready to "share the burden" and said both sides would ensure good governance.
Some economists warn having BI buy more bonds at low yields could have inflationary risks.
David Sumual, chief economist of Bank Central Asia, said the schemes were needed because "the condition is very poor now" and as long as both institutions reached an agreement. ($1 = 14,170.0000 rupiah)
(Reporting by Gayatri Suroyo and Tabita Diela; Additional reporting by Maikel Jefriando; Editing by Martin Petty and Ed Davies) ((firstname.lastname@example.org; +622129927609; Reuters Messaging: email@example.com))