Indonesia will raise nearly 450 trillion rupiah ($27.9 billion) in “pandemic bonds” to finance the country’s efforts to combat the health crisis and economic turmoil caused by the Covid-19 pandemic as demand for government bonds has declined, said a Ministry of Finance document.

The government will also increase its bond sales target by 160.2 to 549.6 trillion rupiah to address the widening budget deficit, which could reach 5.07 per cent of gross domestic product, it said.

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

President Joko “Jokowi” Widodo has announced extra state spending worth 405.1 trillion rupiah to finance Indonesia’s battle against the pandemic, specifically for healthcare, social safety net and business recovery programmes.

“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,” said Sri Mulyani.

However, she said, foreign investors have pulled out of the tradable government bond market, with a benchmark 10-year bond yield of 8.17 per cent at 2:45pm on Monday, a 1.5-year high, indicating investors see increasing risk in Indonesian assets.

At auction, the demand for Indonesia’s debt papers has also declined sharply last month from February, say official documents. At a February 18 auction, the government saw 127 trillion rupiah in bids and absorbed 19 trillion rupiah, while on March 31 it only saw 34 trillion rupiah and absorbed 22 trillion rupiah.

Under the new Government Regulation in Lieu of Law (Perppu) No 1/2020 issued last week, Bank Indonesia (BI) is now permitted to buy government bonds at auction to anticipate if the market is unable to fulfil the government’s financing target.

The regulation revokes a 1999 law on the central bank, which only allowed BI to buy government bonds on the secondary market.

“We will be very transparent so as to maintain the credibility of our fiscal and monetary policies,” Sri Mulyani pledged in front of members of the House. The government is looking to BI to finance the budget deficit, as demand for government bonds declines.

The central bank has purchased 172.5 trillion rupiah in government bonds, including 166.2 trillion rupiah from foreign investors in the secondary market.

Indonesia’s financial markets have been hit by the coronavirus outbreak, with foreign investors having sold 148.76 trillion rupiah in Indonesian assets, including 135.08 trillion rupiah in government bonds and 9.71 trillion rupiah in Indonesian shares, BI data shows.

THE JAKARTA POST/ASIA NEWS NETWORK