theIndonesian – The turbulence that hit the rupiah exchange rate to its lowest psychological level since 2020, due to massive sell-offs in the debt securities market, has pushed up yields on government securities (SBN) in almost all tenors.
Bank Indonesia’s (BI) decision to raise its BI rate by 25 bps to 6.25% in response to pressure on the rupiah, underscores that the era of high interest rates will last longer and affect interest rates in the market including yields on government-issued securities.
The spike in yields occurred due to investor sell-offs during April in the government securities market that reached IDR47.26 trillion. The 10-year SBN yield rose 50 bps to touch 7.21%, while the short 1-year and medium 5Y tenors shot up 78 bps and 50.6 bps to 7.09% and 7.13% respectively.
Long tenors are also not immune from selling pressure. The yields of 15Y, 20Y and 30Y SBN jumped 30.9 bps, 19.2 bps and 17.1 bps respectively in April.
The selling pressure in the SBN market that dragged down the rupiah has indeed subsided relatively recently with the return of foreigners entering and lowering yields back to the range of 6.88% for the 10Y tenor and 3Y to 6.89% until noon trading today, Tuesday (7/5/2024).
However, the persistence of high SBN yields and the potential for spikes to occur again in the future with high global uncertainty, the impact is not only on private bond issuers. The government, which acts as the issuer, also faces the same risk.
Higher yields mean higher cost of funds that must be borne by the government. The cost of debt is higher because the government has to pay higher interest to investors.
This was seen in the last auction held by the government yesterday, Monday (6/5/2024). In yesterday’s auction of state sukuk (SBSN), investors still asked for high yields even though the sentiment in the market had changed.
For the short tenor PBS032, for example, investors asked for a yield of 6.8%-7.15%. Higher than the previous auction in the range of 6.74%-7.12%. The government finally won in the still high range of 6.87% for the weighted average yield won, compared to 6.90% for the same series in the previous auction.
The same thing happened for the Government Securities (SUN) auction on April 30 where investor yield demand touched 8% for the long tenor and 7.5% for the 10-year tenor. The highest yield was won for the 5Y tenor, FR0101, for example, was set at 7.19% and the FR0100 series won the highest at 7.28%.
Before the turbulence occurred, the yield on the same series was only in the range of 6.56%-6.70% and won the highest at 6.61%. Likewise, the favorite series FR0101 won the highest at 6.51%.
The increase in yields will make the government’s debt burden even greater. “This is certainly from the Ministry of Finance for a financing strategy with a cost of funds that tends to increase, and the exchange rate we will continue to manage carefully,” said Minister of Finance Sri Mulyani, in a press conference of the Financial System Stability Committee, last week.
The State Treasurer stated that she will continue to build communication with Bank Indonesia as the holder of monetary policy to maintain macro stability amid global dynamics without having to sacrifice fiscal instruments. “Without having to sacrifice stability, growth momentum and the credibility of fiscal and monetary instruments,” Sri Mulyani explained.
This year, the government is targeting new issuance (net issuance) of SBN this year amounting to IDR666 trillion. When calculating the value of maturing SBN issuance (refinancing), it is estimated that the total issuance of Indonesian debt securities this year will reach Rp1,200 trillion.
Meanwhile, during the first quarter of 2024, the government has attracted debt through SBN emissions worth IDR104.6 trillion, equivalent to 16.1% of the APBN debt target, consisting of net SBN issuance of IDR104 trillion and IDR600 billion in loans.
Total government debt as of the end of March 2024 reached Rp8,262.1 trillion, down from Rp8,319.22 trillion at the end of February. However, compared to March last year, Indonesia’s government debt position increased by 4.86%. The position at the end of March 2024 brought the ratio of debt to Gross Domestic Product to 38.8%.
Of the total debt, IDR7,274.95 trillion was debt in the form of SBN consisting of domestic SBN IDR5,947.95 trillion from SUN IDR4,797.16 trillion and SBSN IDR1,150.79 trillion. Meanwhile, global bonds or foreign currency SBN amounted to Rp1,388.92 trillion.
“The government continues to maintain that the financing strategy will maintain a balance between the cost of funding or cost of funds and the risk of debt,” Sri Mulyani said.
Rupiah Weakening Pressure
The rupiah is still unable to rise from the Rp16,000/US$ zone even though the BI rate has been raised to 6.25% by the central bank. The state budget deficit could also widen due to the sensitivity of state finances to exchange rate movements.
In preparing the state budget, the government uses various assumptions that form the basis for calculating the estimated value of government revenue and expenditure. The assumptions used include the US dollar exchange rate, world oil prices, inflation assumptions, to the yield rate of debt securities (SBN), and others.
For the 2024 State Budget, the government uses the assumption of the US dollar exchange rate at the level of Rp15,000. Now that the US dollar exchange rate has weakened further, approaching Rp16,000, the government’s debt burden could increase.
For every IDR100/US$ weakening of the rupiah, central government spending could increase by IDR10.1 trillion. Meanwhile, the increase in the value of state revenue only increases by Rp4 trillion. Thus, for every IDR100/US$ weakening, the state budget deficit increases by IDR6.2 trillion.
When reflecting on the rupiah’s movement so far this year, the spot rupiah has weakened 4.07% and Bank Indonesia’s JISDOR has weakened 3.8% year-to-date. At yesterday’s market close, BI’s JISDOR rate closed at IDR 16,025/US$.
This means that the rupiah movement this year has been weaker by IDR1,025/US$ than the assumption in the 2024 State Budget. Calculating the sensitivity, the state budget deficit has increased by IDR63.35 trillion.
The Indonesian
