Keynote interview with Luky Alfirman, Indonesia
Indonesia has made impressive use of the international bond markets to endure a volatile year. GlobalCapital finds out what the country is planning next.
Indonesia has responded boldly to the coronavirus. The government’s much-discussed plan to move the country’s capital from Jakarta to East Kalimantan has been shelved. The 3% budget deficit cap, a crucial signal to foreign investors that successive governments are eager to keep the national finances in good health, has also been temporarily abandoned. The central bank and the finance ministry have risked the ire of foreign investors by agreeing to partial debt monetization.
It is certainly not the only country that has been forced to make hard choices. Huge fiscal and monetary stimulus has been the norm. Governments across Asia, including Indonesia itself, have used severe lockdowns to limit the spread of the virus —accepting the trade-off of severe economic disruption.
This has ensured that Indonesia’s moves have been applauded, rather than questioned, by international observers. Indonesia’s reputation as a savvy, mature stakeholder in the international financial system — buttressed by the sterling reputation of finance minister Sri Mulyani Indrawati — has remained intact.
That reputation applies equally to the country’s debt management office, which has proved to be one of the most active, flexible and mature sovereign debt teams in the world over the course of 2020.
The country turned to the dollar bond market three times in the first half of the year, raising $9.8bn, and sold a ¥100bn ($943m) Samurai bond in July. Its dollar deals included a $4.3bn bond in April that is still the closest Asia has come to a sovereign ‘coronavirus bond’, although Indonesia stopped just short of ring-fencing the use of proceeds to fight the pandemic.
When GlobalCapital Asia spoke to Luky Alfirman, director general of budget financing and risk management at Indonesia’s ministry of finance, in early December, he was in a reflective mood. Alfirman spent plenty of time looking back at the funding decisions made in 2020, including the decision to issue a de facto coronavirus bond rather than an official one. But he also looked ahead, talking about the government’s funding plans for next year — and what he most fears from 2021.
The full video is included above but Alfirman’s answers to two of the many questions we asked are included below.
GlobalCapital: There was some talk that your $4.3bn bond in April might be an official Covid-19 bond. In the end, it was something of a hybrid – you decided not to get the official label and explicitly ear-mark the proceeds for Covid relief, but you made clear to investors that the majority of the proceeds would be used to fight the impact of the pandemic. What stopped you from going all the way and selling an official Covid response bond?
Luky Alfirman: We need to go back to really feel what we were dealing with at that time. In April, the Covid-19 pandemic had just started and everything was still very uncertain. We didn’t know about the vaccine at that time. We were still busy with [questions like], ‘How many ventilators do we need? Do we need to build new hospitals? Do we have enough hospital beds?’
When dealing with this uncertainty, at a time when the market is very volatile, timing is very important. And from a government point of view, we need two things. We have to be able to act quickly but at the same time flexibly. Those two things are very, very important for policy makers, especially in that kind of situation.
When we were preparing ourselves to come to market, we had three options: labelling it as an official Covid-19 or pandemic bond, issuing a regular bond or maybe, using your terminology, issuing a hybrid [of the two]. We had experience of issuing thematic bonds, with our global sukuk. Pandemic bonds need extra effort, both in terms of preparation and also later on; after delivery we have to produce a report, for example.
In April, we had to make a decision. We were dealing with uncertainty. How much money should be used for health? For the social safety net? How much should we allocate for medical equipment? Things were very fluid at that time. Things were very dynamic. We had to have flexibility. That’s why, after thinking carefully about it, we decided it was much better for us to issue something in between.
We issued a regular bond but we added a note [for investors], which was that the proceeds will be used to support the handling of the Covid-19 crisis. We rely so much on our reputation. Indonesia has been a frequent issuer in the market. We maintain good communication with investors. That’s our asset and it’s why, even without labelling it explicitly as a Covid-19 or pandemic bond, we were confident that the market response would be quite positive.
GC: Let’s talk about your plans for next year. Can you outline for us your funding target, as well as the likely choice of currencies?
Luky Alfirman: Of course, the financing need for next year will be set by the budget situation. The budget deficit for next year is set at 5.7% of GDP. This is part of the government’s plan to have fiscal consolidation but, dealing with the pandemic, the budget still needs to be expansionary to provide some kind of counter-cyclical support to the economy. In terms of numbers, we’re moving from a 6.34% deficit in 2020 to 5.7% next year, which is lower but perhaps not that much.
Remember that we have relaxed our fiscal deficit rule of 3% of GDP for only three years. In 2023, we have to go back to deficits below 3% of GDP. That’s our commitment. But the way we make that transition has to be smooth.
The nominal amount of financing this year is pretty much the same. The question is: how do we get this financing? First, we’re going to use the government’s internal resources. We have an accumulative cash surplus from previous years. We’re going to use that.
Second, we will continue working with our development partners. In 2020, we had almost $6.9bn of support from multilateral and bilateral development agencies, such as the World Bank, the Asian Development Bank, the AIIB, Islamic Development Bank, KfW in Germany, JICA in Japan, AfD in France. Next year is still a work in progress but we hope we will continue to get strong support from our partners.
The third step is issuance, which will be rupiah and non-rupiah. For non-rupiah, it will be pretty much the same [as 2020]. We will issue a US dollar global conventional bond; a US dollar global sukuk, part of it in the form of a green sukuk; a Samurai bond in Japanese yen; and a euro bond. We are exploring [the idea of issuing] an SDG bond for conventional investors, rather than only in the form of a sukuk.
In the domestic market, we will issue both conventional and sukuk bonds. We are also working on retail bonds.
We will have support from Bank Indonesia, which will continue to be our standby buyer in the bond market every week.