Market Summary

Yield Movements

Local currency (LCY) government bond yields in Indonesia climbed for all tenors between 31 August and 15 October, shifting the curve upward. The overall rise in bond yields was largely influenced by the policy rate hikes undertaken by Bank Indonesia as a preemptive move to maintain the attractiveness of its financial market. Bank Indonesia has raised the 7-day reverse repurchase (repo) rate five times since mid-May for a cumulative increase of 150 basis points.  The Indonesian LCY bond market is highly sensitive to developments in the global market as foreign investors account for the largest investor group in government bonds. Foreign investor holdings of government bonds have been on a downtrend after accounting for over 40% of the total market at the end of January, reflecting investors’ risk-off sentiment toward emerging markets.

Size and Composition

Indonesia’s LCY bond market was the fastest growing in emerging East Asia on a quarter-on-quarter (q-o-q) basis, with growth rebounding strongly to 5.9% in the third quarter of 2018 from only 0.5% in the second quarter. On a year-on-year (y-o-y) basis, growth rose at a faster pace of 13.9% in the third quarter versus 12.0% in the previous quarter. Total bonds outstanding climbed to IDR2,764.3 trillion at the end of September. The outstanding size of LCY government bonds climbed to IDR2,345.4 trillion at the end of September on expansions of 6.2% q-o-q and 13.5% y-o-y. At the end of September, the LCY corporate bond stock reached IDR419.0 trillion on growth of 4.1% q-o-q and 16.5% y-o-y.

Policy, Institutional and Regulatory Developments

On 1 November, Bank Indonesia commenced the trading of nondeliverable forwards settled in Indonesian rupiah as part of measures to help stabilize the local currency. The Jakarta Interbank Spot Dollar Rate will be used as the reference price for domestic nondeliverable forwards, which may be offered by banks to investors and corporates as an alternative hedging tool against exchange rate volatility. To enter into a domestic nondeliverable forward transaction, underlying transactions—such as trade documents, proof of investments, and bank loans in a foreign currency used for the purpose of trade or investment—will be required.