Nama : Kadek Yuki Andika

Student ID : 18/424265/PA/18370

Bank Indonesia Buys US$11.2b in Govt bonds to Support Rupiah, Financing Need
1. Quote
Bank Indonesia (BI) has bought up to Rp 173.1 trillion (US$11.24 billion) worth of
government bonds from primary and secondary markets in a bid to stabilize rupiah and
support the government’s financing needs.
2. Arguments
a. The government on Tuesday raised Rp 16.62 trillion, below the target of
around Rp 20 trillion to Rp 40 trillion, despite total incoming bids of Rp 44.4
trillion as investors bid yields that were too high.
b. The country’s budget deficit is expected to widen to 5.07 percent of GDP this
year as the government would have to increase its gross issuance of debt to Rp
1.4 quadrillion this year to finance the COVID-19 mitigation and rescue
program
c. The currency has depreciated as much as 18 percent this year before bouncing
back to the current level as the central bank moved to support the rupiah by
buying government bonds from foreign investors as they dumped Indonesian
assets over fears related to COVID-19.
3. Questions
a. Why did Bank Indonesia buy its own state debt? Is this some kind of bailout
from Bank Indonesia to the government?
b. The purchase of state debt securities by BI will increase the circulation of
rupiah because BI has to print money to buy the debt securities. That will
certainly cause inflation for Indonesia. How does BI deal with inflation?
c. How Bank Indonesia’s Quantitative Easing Will Sustain the Economy?
d. The government must be careful not to overdo it since massive bond-based
financing will affect the debt security ranking. Moody’s Investors Service has
warned the government of the possibility of the increase in the debt interest
expenses. Moody’s also recorded that the yield rate of the government debt
papers (SUN) with 10-year tenor increased to 7.9 percent last March or was on
par with the rate in October 2018, when the domestic finance market suffered
from massive outflows. Increased yields, followed by a low rupiah exchange
rate against the US dollar, will inflate the interests that the government has to
pay.

4. Relevance
BI bought govt bonds to maintain the stability of the value of the rupiah, which
plummeted due to COVID-19. At present, the rupiah exchange rate against the dollar
continues to weaken. The weakening of the value of the rupiah endangers the
Indonesian economy. For this reason, Indonesia prepared a stimulus of 400 trillion
rupiahs to face COVID-19. To fulfil this, the government issues bonds so that the
State Budget (APBN) is not overburdened. However, now the market conditions are
sluggish. If later the market cannot absorb it, BI will be a non-competitive bidder. The
government issued a regulation that gave BI permission to buy SBN on the primary
market to assist the rupiah further. Changes in the exchange rate of the rupiah against
the dollar have an impact on Indonesia. The following will explain the impacts that
will occur due to changes in the value of the rupiah.

The first case if the rupiah weakens, then imported goods will be expensive. It will
make imported goods unsold in the market. On the other hand, this will result in local
goods being sold in the market. However, local goods whose raw materials are
imported will continue to soar. The weakening of the rupiah will also make Indonesia
an exporter country whose goods are in high demand from other countries because of
the low price of goods. Products made in Indonesia will be found in other countries
such as China now. Large companies will establish many factories in Indonesia
because of low labor costs resulting in unemployment will fall.
Nevertheless, in general, if the rupiah continues to weaken investor confidence in
Indonesia will drop. In the tourism sector, foreign tourists will increase rapidly
because traveling in Indonesia is cheap; this will also reduce the unemployment rate.
Indonesia still uses a lot of imported goods such as fuel that cannot be fulfilled by
itself so that it will trigger price increases. The weakening of the rupiah has a more
negative impact, which is to increase Indonesia's debt and increase inflation. It can
make the country go bankrupt.

In the second case, if the rupiah strengthens, the purchasing power of Indonesian
people will increase. Public purchasing power will be better because of lower
inflation expectations. The prices of imported goods have fallen so that many
imported goods have entered Indonesia. It has resulted in many variations of existing
goods in Indonesia so that the market becomes competitive, resulting in increased
public purchasing power. Indonesia's debt will go down so that the country's burden is
reduced. It will result in Indonesia being able to use debt repayment funds for other
things. The tourism sector will experience a decline in the number of tourists because
traveling to Indonesia becomes expensive. It will adversely affect regions that depend
on the tourism sector. In general, the strengthening of the rupiah indicates an
increasingly good economy for Indonesia.

The weakening or strengthening of the rupiah has positive and negative impacts on
Indonesia. At present, a weaker rupiah has more negative impacts on Indonesia. The
government must immediately make a policy to strengthen the value of the rupiah and
keep the economy right during this pandemic.
 References

Akhlas, Adrian Wail. 2020. The Jakarta Post. April 30. Accessed May 3, 2020.
https://www.thejakartapost.com/news/2020/04/30/bank-indonesia-buys-us11-2b-in-
govt-bonds-to-support-rupiah-financing-needs.html.
Olivia, Grace. 2020. Kontan. April 6. Accessed May 6, 2020.
https://nasional.kontan.co.id/news/moodys-ingatkan-pemerintah-soal-risiko-
pembengkakan-bunga-utang?page=all.