JAKARTA. Bank Indonesia (BI) promised on Thursday to conduct market operations to protect government bonds and the rupiah following a massive withdrawal of foreign funds from the bonds market, totalling to Rp 10 trillion (US$759 million), over the past two weeks.

BI Senior Deputy Governor Mirza Adityaswara said Thursday that the central bank would intervene to stabilize yields of government bonds to prevent further sell-off in the bond market.

“Bigger outflows could harm the stability of our currency, which is why BI will buy government bonds in the secondary market to improve liquidity and anchor currency stability,” he told The Jakarta Post via text message from Palangkaraya, Central Kalimantan.

To stabilize the local financial system, which has been marred by the rupiah’s sharp decline against the US dollar, BI plans to intervene by selling dollars in the foreign exchange (forex) market and buying government bonds in the fixed-income market, a monetary operation that the central bank referred to as “operation twins”.

The government bonds held by the central bank, Mirza explained, would be used to control liquidity in the banking system through the reverse repo instrument, where BI would sell back the bonds and treasury bills to commercial banks.

Massive foreign fund outflows have recently hit Indonesia as indicated by the sharp drop in foreign investors’ ownership of Indonesian bonds. 

The foreign investors’ ownership was roughly 40 percent of the total tradable bonds at Rp 509.3 trillion earlier this month, but this figure shrunk by about Rp 10 trillion to Rp 499.3 trillion as of March 10, according to Finance Ministry data.

In the same period, total government bonds held by BI declined slightly from Rp 53 trillion to Rp 52.7 trillion, suggesting that the central bank has not yet bought enough bonds to counteract the outflow.

Renewed concerns of interest-rate hikes in the US have drained assets stashed in emerging markets, including Indonesia, with both the rupiah and Indonesian bonds suffering the hardest hits.

This month, the rupiah led losses in Asia as it depreciated by more than 2 percent to hit 13,176 per dollar on Thursday, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

Meanwhile, the yields for the benchmark 10-year rupiah bonds have risen 78.4 basis points month-to-date to 7.84 percent. Yields move in the opposite direction of prices such that bonds with higher yields are rated as cheaper assets among investors.

The 78.4 basis points yield increase experienced by Indonesian bonds in March was the steepest among 10 local currency bonds tracked by Asian Bonds Online. For comparison, the Vietnamese bonds, the second-worst performer after Indonesia, only saw their yield increasing by 23.7 basis points month-to-date.

As a result of this inconducive situation in the local bond market, the government decided to cancel the debt switch plan scheduled on Thursday. “Our major dealers say that the appetite of investors isn’t that good,” Robert Pakpahan, the head of Finance Ministry’s financing and risk management office (DJPR), told the Post.

BI has been intervening less in the bonds market since Governor Agus Martowardojo took charge of the central bank in 2013, as the former banker seeks to avoid price distortion and boost trading liquidity in the domestic bonds market. 

BI’s net purchase of government bonds has fallen from Rp 37 trillion in 2013, to Rp 10 trillion in 2014, to Rp 390 billion for the first two months this year, according to data from the Finance Ministry and the central bank.

“It would be good if BI wants to buy more government bonds as it can play a balancing role in the market,” commented Dina Agmivia Anggraeni, a fixed-income analyst with Trimegah Securities.

“Lately our bonds market has been a one-way street, with prices falling too sharply when foreign investors suddenly sell their bonds,” she added.

Nevertheless, intervention in the bonds market should not be over the top because higher yields would make the nation attractive among investors, thus luring back foreign inflows, former finance minister Chatib Basri said Thursday. (Satria Sambijantoro)

Editor: Yudho Winarto