Market Summary

Yield Movements

Local currency (LCY) government bond yields in Indonesia declined for most maturities between 31 August and 30 October. The overall trend of declining yields was driven by expectations that Bank Indonesia would continue to maintain an easy monetary policy stance amid low inflation and a weak economic outlook. The coronavirus disease (COVID-19) outbreak in Indonesia has taken a toll on economic growth. A resurgence in the number of cases led the government to re-enforce social restrictions in September, further dampening investor sentiment in the bond market. In October however, investor interest picked up, leading to capital inflows for the first time since July, buoyed by the passage of the Omnibus Bill on Job Creation that is expected to improve investment climate in Indonesia.

Size and Composition

The LCY bond market in Indonesia continued to expand to reach a size of IDR3,940.6 trillion (USD264.8 billion) at the end of September. Overall growth accelerated to 9.9% quarter-on-quarter in the third quarter of 2020 after rising 7.8% quarter-on-quarter in the second quarter. The faster growth stemmed largely from the expansion in government bonds, particularly Treasury bills and bonds, due to the government's increased borrowing needs to support its stimulus measures and recovery efforts amid the COVID-19 pandemic. Corporate bonds also contributed to growth, albeit to a lesser extent. On the other hand, the stock of central bank bills and bonds contracted during the review period. On a year-on-year basis, growth in the LCY bond market of Indonesia quickened to 22.4% in the third quarter from 16.8% in the previous quarter, making it the fastest-growing bond market in the region.

Policy, Institutional and Regulatory Developments

In September, the Indonesian Parliament approved the 2021 state budget, which calls for a deficit equivalent to 5.7% of GDP. The 2021 state budget estimates revenue will reach IDR1,743.7 trillion, while state spending is expected to total IDR2,750.0 trillion. The underlying macroeconomic assumptions for the 2021 state budget include (i) economic growth of 5.0%, (ii) average inflation of 3.0%, (iii) an exchange rate of IDR14,600 per USD1, (iv) an average 10-year bond yield of 7.29%, and (v) Indonesian crude oil price of USD45 per barrel.