Indonesia’s onshore bond and FX markets – a primer

We present our flagship investment primer report on Indonesia’s bond and FX markets.
Radhika Rao22 Jun 2021
  • Indonesia’s public finances have undergone notable improvement over the past two decades
  • Rating agencies have recognized this, awarding with upgrades two years ago
  • Outstanding debt is predominantly owned by domestic buyers
  • Foreign investors, including sovereign entities, can freely access Indonesia’s debt markets
  • The Indonesian rupiah operates on a free-floating exchange rate system
Photo credit: Unsplash

Indonesia’s public finances have undergone notable improvement over the past two decades, which has been accompanied by significant deepening and broadening in its financial markets. We present our flagship investment primer report on Indonesia’s bond and FX markets.


Overview of public debt and fiscal backdrop
Overview of onshore bond markets
Presence in global bond indices
Sovereign rating agencies
Monetary policy framework
Indonesia: Currency markets

Overview of public debt and fiscal backdrop

Indonesia’s public finances have undergone notable improvement over the past two decades. Investors and credit rating agencies have recognised this, evidenced by rating upgrades deeper into investment grade, with S&P and Fitch placing the economy on BBB and Moody’s on Baa2. S&P followed up with an upgrade in May 2019. The agency, however, lowered the rating outlook to negative in April 2020, citing risks from the pandemic.

We compare Indonesia’s trends vs regional peers - India, Philippines, Thailand, and Malaysia, selected few in the region which consistently run budget deficits and are one or two rungs above the sub-investment grade, with the exception of Malaysia which ranks above the rest. Compared to these countries, Indonesia has fared well on both level of fiscal deficits as % of GDP as well as government debt levels. In the past decade, deficits have remained below 2.5%, compared to 7% in India and 4% in Malaysia.

Government debt levels in Indonesia, whilst creeping up in recent years, are still way below the permissible threshold and lower than its BBB peers as well as countries compared in our sample set. Fitch Ratings reinforced this, opining that Indonesia’s debt burden and its increase in 2020 are still significantly smaller than the 'BBB' category median of 51.7% (vs Indonesia’s 36-39% in 2020-2021). Add to this, primary balance (net of interest payments) to GDP has been largely stable, averaging -0.6% of GDP between FY16-FY19.

Indonesia has two types of fiscal rule - for budget balance and public debt. The ceiling on the budget deficit is capped at 3% of GDP and maximum government outstanding debt is capped at 60% of GDP. This raises accountability, helps anchor public finances, and keeps vulnerabilities in check. Near-term strain on the public books is unavoidable, owing to COVID-19. The budget deficit cap has been temporarily relaxed for 2020-2022, to provide greater flexibility in responding to the health crisis. Higher deficits have pushed the public debt level to 39.4% of GDP vs 30% in end-2019. Concurrently, this is likely to sharply lift debt/ revenues ratio, which underscores not only a rising debt load but also benign underlying revenues. Expectations are that beyond the near-term deterioration, efforts will be made to return to narrower deficits by 2023 and reinstate fiscal rules. This path is premised on the pandemic being brought under control and recovery taking root. Accordingly, the 2021 deficit target is pegged at -5.7% of GDP and likely to be drift to 4.5-4.8% in 2022.

Positive track record, few soft spots

Indonesia’s fiscal track record is encouraging when compared to regional peers, but there are a few areas where further work is required.

Need for a structural lift in fiscal revenues: Tax revenues dominate Indonesia’s receipts mix. These revenues were robust in the years of the commodity boom (see chart below) until 2012, before moderating. This is reflected in the oil & gas earnings under tax as well as non-tax receipts from the sector.

Non-tax O&G revenues grew 17% y/y between 2003 to 2012, before slowing to 6% in the past seven years to 2019. Concurrently, these revenues accounted for an average 20% in the decade to 2012, which has since narrowed to a tenth of the total tax revenues. This underscores the still high reliance on resource-based revenues, going beyond the first order impact of commodity prices on income and employment levels. Besides this, tax buoyancy i.e. responsiveness of revenues to shifts in growth or national income, is sub-par, as is tax to GDP ratio which lags regional peers and is amongst the lowest amongst BBB category peers. Few reasons behind this are the sizeable presence of the informal sector which has narrowed the tax base, lower tax compliance, and weak monitoring mechanism, resulting in leakages.

Efforts to boost non-commodity revenues and overall revenues are a priority for the authorities. Recent efforts include introducing a tax amnesty program (2016-2017 in the recent past), updating the tax database, exploring levies on new-age sectors, amongst others. Host of tax reforms are being sought in 2022, including a) tiered value added tax rates, with higher brackets for luxury/sin items; b) a digital tax on companies and levies on e-transactions; c) higher tax rate for high net worth individuals; d) carbon tax, to be either embedded in existing tax lines or as a surcharge, amongst others. While the appetite to impose and timing of these changes hinge on the path of the pandemic and pace of recovery, the intent to consolidate finances is a tailwind for debt markets.

Selective support for state-owned enterprises is a favourable move. Indonesia’s SOEs have been notable contributors to the economy’s development agenda via infrastructure investments, support for vulnerable businesses etc. OECD notes, in a 2018 report, that a SOEs’ financial vulnerabilities have necessitated public capital injections, adding that implicit fiscal risks from SOE losses and rising debt, require attention. Fitch Ratings expects the gross combined debt of SOEs increased to 7.3% of GDP in March 2020 from 4.7% two years earlier, highlighting that if this increase hastens, it will impinge on the government’s fiscal vulnerabilities. Amidst pandemic firefighting, the government has rationalised available resources, refocusing towards higher social sector spending and adopting a selective and differentiated support for SOEs. Indications are that rather than outright equity injections, incremental support might be channelled through refinancing credit lines via state owned banks or debt restructuring options.

Overview of onshore bond markets

Government securities
On aggregate basis, government securities (also referred to as SBN) comprise of sovereign debt securities as well as state sharia instruments.

• Government bonds: Bonds are issued by the Ministry of Finance, domestically referred to as SUN i.e. Surat Utang Negara, denominated in rupiah or foreign currencies. These are primarily fixed rate bearing, with coupons paid twice a year. Auctions are held twice a month, with the tenor of the instruments spanning between one to 30years.
• Treasury bills: These bills are short dated i.e. for less than a year, primarily issued for 90days /and 120 days duration. There are locally referred to as SPN i.e. Surat Perbendaharaan Negara.
• Islamic bonds and treasury bills: These are referred to as shariah securities (SBSN) or Sukuk, which are state securities issued under sharia principles, denominated in both rupiah and foreign currency. Issuance of these securities can be done by the government or by the SBSN Issuing Company i.e. an onshore special purpose vehicle established by government regulation. Islamic treasury bills are also referred to as Surat Perbendaharaan Negara-Syariah (SPN-S) for shorter-tenor securities, predominantly for the 6M tenor and sold at a discount.

Size of the market

As of Mar21, the size of the domestic currency bond market stood at IDR4,799trn (U$330.4bn), 36% up on the year. Of these, government bonds make up the lion’s share i.e. 89% of the total, followed by corporate issuances at 9% and rest by the central bank. The faster growth of the overall securities market was partly due to higher financing needs to support stimulus measures and recovery efforts amid the pandemic. The size of the domestic government bond market has nearly doubled to 28% of GDP in the past decade.

The maturity profile of the outstanding government securities (includes central government, central banks etc.) is dominated by less than 10Y papers, which make 65% of the total. Amongst this, the 5-10years maturity makes for the majority.

Global issuance

Indonesia taps the international bond markets on a regular basis, with 12-15% of the annual issuance raised via G3-currency denominated papers. Amongst these, the dominant currency is US$, followed by EUR and rest others (see chart below). Concurrently the government has also been raising funds from the offshore sukuk market since 2009. Combining global and green financing needs, in June 2021, the country sold US$3bn US dollar sukuk in 5Y, 10Y and 30Y tenors. The 30Y paper marked the first long-tenored dollar green security as these proceeds will be used to finance or refinance expenditure directly related to green projects. Earlier in the year, Indonesia raised an equivalent of $4.3 billion from a dual-currency bond offering i.e. three US dollar tranches and one EUR tranche.

Institutional framework

The main issuer is the Ministry of Finance. The Financial Securities Authority (OJK) was created in 2011 as a single nodal regulatory authority to oversee the financial and capital markets. The OJK also subsumed the role of the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) in 2013 as well as took over the supervision of financial institutions from BI in 2015.

Issuance and auction

Bank Indonesia acts as the government’s agent to facilitate the auction process, while global bond placements are conducted by a panel of selling agents. Annual issuance details are outlined by the government in the final quarter of the preceding year. The MOF holds government bonds and SBSN auctions once in every two weeks, alternating between the two type of instruments.

Auctions of the government securities may be conducted using competitive or noncompetitive bidding processes, adopting a multiple price system. Floating rate bond auctions tap price-based bids, whilst fixed-rate bonds/ bills use yield-based bids. Greenshoe options are held at occasions of undersubscription i.e. issued bonds are lower than the set target and implemented a day after the actual auction.

Taxation and settlement

Foreign investors’ interest income is subject to a 20% withholding tax and an equal % of capital gains tax. This will be lowered as part of the authorities’ efforts to draw in more interest. The withholding rate for income tax on bond interest income (including Sharia) received/earned by a foreign taxpayer other than a permanent establishment is reduced to 10% or according to the tax treaty rate [4].

For bonds, settlement at the BI Scripless Securities Settlement System (BI-SSSS) is conducted on a real-time basis. According to Clearstream, the settlement period is negotiable between buyer and seller, with the usual practice being T+2 or T+3. Bank Indonesia, as the central registry, only deals with banks and with sub-registries (custodians). Each sub-registry maintains an omnibus account and a single cash account at BI to facilitate settlement of government bonds (GDS) and BI certificates (SBI) and, in turn, investors must open accounts with the sub-registries. The accounts at sub-registry level should reflect the owner of the GDS and SBI.

The Finance Ministry appoints banks and securities firms as primary dealers to buy government bonds and trade in the secondary markets. The primary market is dominated by commercial banks and foreign investors, comprising of 16 banks and 4 securities companies [1] for conventional bonds. Bank Indonesia can participate in the primary as well as secondary bond markets, but for short-term instruments i.e. T-bills and sukuk, participation is limited to non-competitive bidding

About ownership of the outstanding conventional government bonds in the secondary market, 33% is held by commercial banks, 12% by Bank Indonesia (net basis) and remaining by non-banks. Amongst non-banks, residents comprise of mutual funds (3.3%), insurance and pensions funds (13%), and individuals (3%), amongst others. Non-residents i.e. foreign investors held 30% of the overall government bonds, with the latter continued to ease into mid-2021. Sovereign entities and global central banks make up 5% of the share.

Ownership of tradable outstanding shariah securities is dominated by 45% held by banks, 11% by government institutions (including net BI holdings) and rest by non-banks.

Trading volumes for domestic government in the secondary markets, on volume basis, shows that the less than 5 year tenor is the most liquid making up close to half of the total issuance by May 2021, followed by 5-7 years at around 35%, with the longer-tenors i.e. over 7 years making up for the rest.

Foreign investors

Foreign investors, including sovereign entities, can freely access Indonesia’s debt markets and are not subject to ownership thresholds. As of May 2021, foreign ownership of domestic government securities stood at 22.7% of the total, at IDR957trn. Foreigners own a bigger share of the belly-to-longer tenors of the government debt securities, with the 5Y and above tenors accounting for 70% of the total purchases. Amongst the sharia securities, 80% of the purchases constitute less that 5Y tenor.

Presence in global bond indices

Indonesia’s IDR-denominated government bonds joined the Bloomberg Barclays Global Aggregate Index as of May 2018, (starting with 50 securities) joining the ranks of Japan, Australia, Hong Kong, Malaysia etc. Besides being an IG credit, a key attractive factor is the foreigners’ relatively free access to the local debt markets.

Risk-free rupiah securities are also part of the JP Morgan Global Bond Index- Emerging Markets (GBI-EM) Broad as well as the narrow indices, drawn by the readily accessible debt markets for foreign participation. More recently, Indonesia has also become a part of the GBI-EM Global Diversified 10% Cap 1% Floor (GBI-EM Global 10/1), which is similar to the flagship GBI-EM Global Diversified Index, but 10/1 applies a 10% cap and 1% floor diversification schema. As the main index, this too includes only those countries that are accessible by most of the international investor base and selects bonds from each of the emerging market countries set forth below that are fixed-rate, domestic currency government bonds with greater than 6 months to maturity. In Asia, Indonesia is accompanied by China, Malaysia, Philippines, and Thailand under this index.

Other bond categories
• Retail treasury bonds: These retail bonds, also known as Obligasi Negara Ritel (ORI), carry a minimum denomination of IDR1mn to allow small savers to also invest in government securities. These securities can be bought through the primary markets (through agents) or in the secondary market via banks and securities companies. Besides ORI, there are also retail state sukuk (called SR), savings bonds retail (SBR) and Sukuk Tabungan (ST), with the latter two not traded in the secondary markets.
• Bank Indonesia bonds: BI issues its own debt securities to support its open market operations as well as for liquidity management, for both conventional as well as sharia instruments in rupiah and foreign currencies. Tenors are essentially short-term, capped at 1year. First of these kinds are BI certificates, known as SBI (Sertifikat Bank Indonesia), which are issued in 28days to 182 days. Since 2017, the range of OMO instruments was diversified to constitute of 3 and 6 months as BI certificate of deposits (SDBIs) and SBIs for 9 & 12 months, alongside government securities reverse repo with 2-week tenor.
• Municipal bonds: These instruments are issued by a province or district government, primarily to finance public service projects. Typically, OJK supports cities and regions to access financing with this tool, instead of relying on bank loans
• Corporate bonds: These bonds and notes are issued by banks, finance companies and corporates, includes conventional bonds, notes as well as sukuk and has short-tenor papers (e.g. commercial papers) and medium-term notes. By end-2020, outstanding corporates bonds stood at IDR425trn, of which 7% was sukuk offerings, according to data from the Asia Development Bank. By late last year, the aggregate bond stock of Indonesia’s 30 largest corporate bond issuers accounted for 73% of the total outstanding bonds, at IDR310trn, led by seven state-owned firms, and half of these 30 were from banking and finance.
• Derivatives: cross currency swap markets and interest rate swaps face thin liquidity.

Sovereign credit ratings

Indonesia’s stable fiscal and public debt track record has seen the economy’s sovereign credit ratings remain in the investment grade category by all three main global rating agencies. The tables below provide a regional comparison of ratings, and the timeline for Indonesia’s ratings moves.


Brief history
• Prior to 1945, under the colonial era, Netherlands’ Indies gulden and a Japanese variation of the gulden were the predominant modes of exchange, with first version of the Rupiah introduced in 1946.
• End of the colonial era and independence in 1950 was followed by currency reforms accompanied by the unveiling of the official Indonesian rupiah in 1951.
• The period of the 1950s to late 1990s covered a period of FX restrictions followed by a phase of fixed exchange rates, before the introduction of a managed float. Bouts of devaluations was necessitated by periods of economic uncertainty heading into the Asian financial crisis in the late 90s, after which the currency has witnessed a period of relative stability.
• Bank Indonesia (BI) operates a free-floating FX system. Its main objective is to achieve and maintain the stability of IDR value. In pursuit of this objective, BI’s roles includes formulating and implementing monetary policy, regulating and ensuring a smooth payment system, and maintaining financial system stability.

IDR fixing mechanism
Fixing Mechanism is a transaction settlement mechanism without movement of the principal fund by way of calculating the difference between the forward transaction rate and reference rate (JISDOR) at a certain date which is already fixed in the contract (fixing date).

FX products
-FX Spot
-FX Forward (up to 1 year)
-FX Swaps (up to 1 year)
-Cross Currency Swaps (up to 5 years)
-Interest Rate Swaps (up to 7 years)
-Call Spread Options (up to 5 years)
-Domestic Non-Deliverable Forwards (DNDFs)

FX framework
• In offshore markets, the Rupiah (IDR) is tradable on non-deliverable basis
• Key participants comprise of interbank players (involved in spot/ forwards/ FX swaps), corporates (domestic and MNCs), real money and hedge funds.
• Reference Rate: Jakarta Interbank Spot Dollar Rate (JISDOR): JISDOR is the reference for USD/IDR spot transactions in the domestic market. It represents the weighted average of USD/IDR spot transactions traded in the interbank market within a specific window, captured on a real time basis through BI’s monitoring system of foreign exchange transactions against IDR. In the event there is no USD/IDR spot transaction traded in the interbank market during the specified window, JISDOR will be calculated based on the weighted average of USD/IDR spot transactions traded in the interbank market between 9.00am and 3.00pm Jakarta time and announced by 3.15pm Jakarta time. Presently, BI’s monitoring system for JISDOR calculation captures only interbank transactions, however from January 2022, all clients dealing above USD 250k will also need to be captured onto the BI monitoring system as a part of JISDOR calculations.
• Domestic Non-Deliverable forwards (DNDF) was introduced by the BI in 2018, which is a plain vanilla FX derivative transaction against IDR in the form of a forward transaction, using fixing mechanism in IDR that is carried out in the Indonesia’s domestic market. As market makers, banks are permitted to trade DNDFs with each other and with domestic/ offshore clients provided the latter have underlying business, supported by valid documents.

Regulations (highlights)
• In offshore markets, the Rupiah (IDR) is tradable on non-deliverable basis. An amount of less than IDR100mn can be taken physically freely out of Indonesia at any one time.
• Residents: Purchase of notional 25k/month or equivalent by Indonesian nationals and legal entities from banks must provide certain documents to BI including the underlying transaction documentation. Under this limit can be purchased in absence of underlying transactions. Documents must be submitted at the latest at settlement date for spot transaction, and at the latest at T+5 for derivative transactions or at the settlement date if the tenor of derivative transaction is less than 5 days.
• Mandatory Use of Rupiah: BI Regulation No. 17/3/PBI/2015 stipulates the Mandatory Use of Rupiah within the country for: a) transactions in Indonesia that are for the purpose of payment; b) transactions in Indonesia that are for the settlement of other obligations that must be fulfilled with money. Other financial transactions in Indonesia.; c) certain transactions are exempted from the mandatory use of the rupiah like bank savings in foreign currencies etc.
• Export Proceeds and Import Payments: Aims to increase efficiency in monitoring of receipt of foreign exchange from export proceeds and expenditure in foreign currency for import payments through banks in Indonesia in order to support optimization of utilization of foreign exchange from export proceeds and monitoring of foreign exchange for import payments (regulatio
• Non-residents[3]:
o Foreign currency against IDR transactions between banks and foreign parties: These can be transacted with underlying The transactions like: (a) sale of goods and/or services inside and/or outside Indonesia, and (b) investments in the form of direct investment, portfolio investment, loan, capital, and other domestic or overseas investment. These are considered as underlying transactions: (i) utilization of Bank Indonesia Certificate for a derivative transaction and (ii) placement of funds in a bank
o Hedging transaction to banks: Transactions (either hedging on buying transactions or hedging on selling transactions) shall be conducted in accordance with the BI regulation that governs FX transactions against Rupiah between banks and domestic parties (i.e., PBI 16/16). This includes payment of debt in foreign exchange, import and export activities, and investment activity.

• Bank Indonesia webpage
• Indonesia Stock Exchange
• ADB: ASEAN+3 Bond Market Guide 2017 Indonesia
• ADB: Asia Bond Monitor March 2021
GBG Indonesia: Legal updates
• [1]IDX: Primary dealers’ profile
• [2]Bank Indonesia regulations
• [3]SSEK: regulations
• [4]International Rax review
J.P Morgan product page

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Radhika Rao

Economist – India, Indonesia, Thailand & Eurozone
[email protected] 
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