Indonesia's government bond yield curve shifted downwards in June from end-December levels for most maturities under 15 years. The shift reflects improving confidence in the economy as inflationary pressures continued to ease and macroeconomic conditions have improved. Consumer price inflation dropped to 2.71% in July after peaking at 12.14% in September of last year.

Easing inflationary pressures and improving macroeconomic conditions allowed Bank Indonesia (BI) to lower its benchmark rate to a record low of 6.5%. The central bank has reduced its key rate by a total of 275 basis points year-to-date.

Indonesia's total local currency (LCY) bond market reported strong y-o-y growth in 2Q09. In terms of LCY base, the bond market grew 12.3% y-o-y. On a quarter-on-quarter (q-o-q) basis, the size of the LCY bond market grew 1.0%. In 2Q09, the stock of central government bonds rose 6.6% y-o-y. The government resumed its issuance of treasury instruments in early January, following the cancellation of all scheduled auctions during 4Q08 amid volatile market conditions.

Bank Indonesia also continued to actively issue Sertifikat Bank Indonesia (SBI) bills in 2009 as part of its sterilization efforts. The stock of central bank bills outstanding rose 40.9% y-o-y in 2Q09. However, on a q-o-q basis, central bank bills fell 3.9%. The stock of corporate bonds, while lower in June at IDR75.21 trillion compared with one year earlier, showed signs of recovery. Corporate bonds outstanding rose 2.6% q-o-q in 2Q09. Since June of last year, the amount of corporate bonds outstanding had recorded quarterly declines.

The monthly government bond turnover ratio in Indonesia recovered to 0.08 in June, after dropping to a low of 0.04 in December. Trading value has also steadily risen, reaching IDR 41.94 trillion. Meanwhile, corporate bond turnover has remained relatively flat since the beginning of the year at 0.02, while corporate trading value reached IDR1.80 trillion in June.

Developments in the first half of 2009 were geared towards stimulating the economy and ensuring ample liquidity. The 2009 fiscal stimulus package in the amount of IDR73.3 trillion was endorsed by the House of Representatives in February.

In March, Indonesia forged bilateral currency swaps with the People's Republic of China amounting to CNY100 billion – IDR175 trillion (USD15 billion). The currency swap-arrangement is expected to provide short-term foreign exchange liquidity as well as boost bilateral trade and investment agreements between the two countries. To further boost liquidity, The Bank of Japan and Bank Indonesia agreed to increase the maximum amount of the bilateral swap arrangement under the Chiang Mai Initiative of the ASEAN+3 Finance Ministers. This allowed Indonesia to swap Indonesian rupiah up to an equivalent USD12 billion.

In the bond market, the Indonesia Bond Pricing Agency (IBPA) will begin publishing daily reference prices for corporate bonds and sukuk by 3Q09. This move is expected to help improve transparency and make Indonesia's debt market more attractive to investors.