Market Summary

Yield Movements

Local currency (LCY) government bond yields in Indonesia continued to decline between 31 August and 15 October.  The overall decline in Indonesia’s LCY government bond yields was largely driven by the accommodative monetary policy stance of Bank Indonesia. The central bank lowered the policy rate four times, by 25 bps each, during the monthly Board of Governors meetings from July to October. The decisions to lower rates were taken to bolster economic growth and boost lending activities as the global economic outlook weakened.  The decline in bond yields was also influenced by the accommodative monetary stance of central banks in advanced economies. As a low-interest-rate environment prevailed, foreign funds shifted toward higher-yielding emerging market assets. Relative to its emerging East Asian peers, bond yields in Indonesia remain high, making it a favored destination of foreign funds. 

Size and Composition

At the end of September, the LCY bond market in Indonesia expanded to a size of IDR3,229.9 trillion (USD227.5 billion), as growth rebounded strongly to 5.2% quarter-on-quarter in the third quarter of 2019 after contracting 0.5% quarter-on-quarter in the second quarter. The robust growth during the quarter largely stemmed from growth in central government bonds and, to a lesser extent, central bank bonds and corporate bonds. Total government bonds outstanding climbed to IDR2,792.3 trillion and corporate bonds reached IDR437.5 trillion at the end of September. 

Policy, Institutional and Regulatory Developments

In August, the Government of Indonesia signed a new regulation that will lower the tax on interest income from bond investments to 5.0% from 15.0% for infrastructure investment funds, real estate investment funds, and asset-backed securities. The reduction in taxes will take effect in 2020 and be adjusted to 10.0% by 2021, making the applicable tax rates for these financial products at par with those of mutual funds.