Market Summary

Yield Movements

Local currency (LCY) government bond yield movements in Indonesia diverged across tenors between 15 June and 15 August. Excluding the 3-year tenor, bond yields fell from the 1-year through the 10-year maturities, shedding an average of 12 basis points (bps). In contrast, yields edged up marginally by an average of 3 bps for all maturities of 12 years or more except for the 16-year, which slipped 2 bps. The decline in yields for maturities of 10 years or less largely reflected the weakening economic outlook as economic activities were once again halted by the reintroduction of mobility restrictions in July. The spike in COVID-19 cases due to the emergence of virus variants, particularly the more contagious delta variant dampened economic recovery and dragged down investor sentiment. 

Size and Composition

Indonesia’s LCY bond market growth decelerated to 2.4% quarter-on-quarter in the second quarter (Q2) of 2021 from 6.2% q-o-q in the first quarter of 2021 to reach a size of IDR4,912.3 trillion (USD338.8 billion).  Central government bonds comprising both Treasury bills and Treasury bonds continued to drive growth, as the government issued additional bonds to help fund the budget deficit. Central bank bonds also contributed to the growth but to a smaller extent. In contrast, the stocks of nontradable bonds and corporate bonds posted quarter-on-quarter declines in Q2 2021. On a year-on-year basis, Indonesia accounted for the fastest LCY bond market growth in emerging East Asia in Q2 2021, albeit at a moderated pace of expansion of 30.6% versus 36.0% in the preceding quarter.

Policy, Institutional, and Regulatory Developments

Effective 2 August, Bank Indonesia and Bank Negara Malaysia expanded their LCY settlement framework to encourage the use of Indonesian rupiah and Malaysian ringgit for the settlement of trade and direct investment transactions between Indonesia and Malaysia. The new policies in the expanded settlement framework are as follows: (i) inclusion of direct investments, income, and transfers as eligible transactions; (ii) inclusion of individuals as eligible participants; and (iii) simplified documentary requirements for tapping the framework. Both central banks also appointed additional banks to facilitate the LCY settlement framework.