Aditya Suharmoko, Jakarta – Despite the government's recent measures to ease panic in domestic debt market, concerns over the sustainability of the state budget, coupled with accelerating inflation, have caused portfolio investors to remain on high alert.
Chairman of the government bond traders Thomas Arifin said on Monday government bond investors were still jittery over the rising risk of bonds following signs that soaring fuel subsidies would undermine fiscal sustainability.
"The market was confused, waiting for a decisive fiscal policy from the government," Thomas, who is also the Bank Mandiri director for treasury, said.
"The market was waiting for answers on how the government would cover the (state budget) deficit amid the soaring fuel subsidy," he said.
Since early last week, investors have jumped on the bandwagon to dump government bonds due to a concern, among others, that accelerating inflation would undermine economic growth.
During the year's first quarter inflation reached 3.41 percent, more than half the government's target of 6.5 percent, according to the Central Statistic Agency.
Concerns among investors have been exacerbated by a projected swelling of the state budget deficit from increasing fuel subsidies, following higher global oil prices.
The widening deficit will force the government to flood the market with more bonds to compensate for the shortfall, a move which will raise the risk on bonds, since investors will demand a higher yield.
On Thursday, panic among investors triggered an increase in government bond yield. The yield from the 20-year FR0047 bond, one of the market benchmarks, rose to 12.58 percent, from 10.92 percent on Feb. 29.
The government, however, bought back Rp 2 trillion (US$217 million) worth of short-term bonds the following day, and temporarily eased pressure on the bonds, which are now considered fairly risky.
Thomas said intense cooperation between the government and the central bank to synchronize their monetary and fiscal policies was crucial to ease panic in the debt market.
He explained that while the market was grateful the government had responded well in stabilizing short-term bond prices, more efforts were needed to stabilize bond prices in the long term.
The government said it was committed to buying back bonds to retain market confidence by launching treasury bills between April 22 and 29.
Zero-coupon and floating-rate bonds are expected to hit the debt market this month.
Bank Indonesia (BI) deputy governor Budi Mulya said the market had asked for higher yields to offset the declining bond prices.
Budi said in a bid to stabilize bond prices BI had prepared several measures, including storing bonds with declining prices at the central bank for 14 days, and returning them to the market when the fluctuation eased.
"We want to assure the market that the bond prices will not decrease while we are holding them," he said.