Market Summary

Yield Movements

Local currency (LCY) government bond yields in Indonesia declined between 1 June and 15 August, shifting the entire yield curve downward. The downward trend in bond yields was largely influenced by the 25 basis point policy rate cut by Bank Indonesia announced on 18 July and the sovereign ratings upgrade by S&P Global Ratings on 31 May. Dovish stances by central banks in major advanced economies likewise contributed to the decline in bond yields. Amid global growth moderation and low inflation, the European Central Bank and the Bank of Japan hinted at easing measures, and the United States Federal Reserve undertook a 25 basis point cut of the federal funds target rate on 31 July. This, in turn, fueled investor interest in higher yielding emerging market assets such as Indonesian bonds.

Size and Composition

Indonesia's LCY bond market reached a size of IDR3,069.9 trillion (USD217.3 billion) at the end of June, as growth contracted a marginal 0.5% quarter-on-quarter (q-o-q) in the second quarter of 2019 amid contractions in both central bank bonds and corporate bonds. On a year-on-year (y-o-y) basis, overall bond market growth moderated to 17.6% in the second quarter of 2019 from 18.7% in the first quarter. The stock of LCY government bonds at the end of June totaled IDR2,652.6 trillion, with growth falling 0.3% q-o-q but rising 20.1% y-o-y. In the same period, corporate bonds outstanding stood at IDR417.3 trillion, down 1.6% q-o-q but up 3.7% y-o-y.

Policy, Institutional and Regulatory Developments

In August, the President of Indonesia announced the macroeconomic assumptions for the draft 2020 state budget. Among the assumptions were (i) economic growth of 5.3% to be driven by consumption and investments, (ii) an inflation target of 3.1% to support purchasing power, (iii) an exchange rate of IDR14,400 per US dollar, (iv) a 3-month Treasury bill rate of 5.4%, and (v) an Indonesian crude oil price of USD65 per barrel. The government is looking at a 2020 budget deficit equivalent to 1.76% of gross domestic product.