(Feb 21): Indonesia is planning a large issuance of bonds to fund President Prabowo Subianto’s ambitious public housing programme, with the central bank agreeing to buy the debt in the secondary market.

The bond sale will help expand the government’s home ownership loan facility, Finance Minister Sri Mulyani Indrawati told reporters in a briefing late on Thursday, without elaborating on the issuance size.

Housing Minister Maruarar Sirait said separately that the issuance would certainly be large, though the numbers are still being finalised, according to a report by Bloomberg Technoz.

It was not immediately clear if the sale is already part of the government’s US$40 billion (RM176.71 billion) borrowing plan this year, and the Finance Ministry did not immediately respond to questions.

Ten-year bond yields were largely unchanged at 6.79%, paring some of the drop it recorded earlier on Friday. The rupiah closed 0.2% stronger against the the dollar, but was the weakest among Asian peers this week, losing nearly 0.3%. The local stock gauge went up 0.2% on Friday.

Bank Indonesia (BI), which is set to purchase over US$9 billion of government bonds in the secondary market this year, pledged to buy the property-linked bonds. Governor Perry Warjiyo earlier said that the bond-buying would be carried out in line with its monetary operations’ objectives.

The central bank’s share of government local bonds already stands at about 25%, among the highest compared to peers in Asia. BI has bought about 33 trillion rupiah (US$2 billion or RM8.94 billion) worth of bonds so far this year. 

It highlights the extent by which fiscal and monetary policymakers have been roped in to help execute the president’s economic agenda, which has begun to raise concerns among investors.

“There is no macroeconomic stress or liquidity issue to justify a pre-commitment to buy specific issues linked to the housing market,” said Rajeev De Mello, Gama Asset Management SA's portfolio manager, responding to BI’s readiness to buy the bonds in the secondary market.

Monetising the debt could worry foreign investors and could pressure the rupiah, as they are concerned that “long-standing anchors of Indonesia’s financial stability are being weakened”, De Mello added.

Other than the bond plans, BI will lower the reserve requirement for banks that extend mortgage loans, raising its liquidity incentives for the housing sector to as much as 80 trillion rupiah (US$4.9 billion or RM21.68 billion). The Finance Ministry is also undertaking US$19 billion in spending cuts across government to reallocate more money for Prabowo’s priority programmes.

Indrawati said this is the ministry’s way of showing its “financial creativity, so that we can maintain fiscal discipline, while keeping our state budget responsive”, and supportive of the flagship programmes of the president.

The government had initially budgeted US$1.7 billion this year for subsidised mortgages covering only 220,000 houses, well below Prabowo’s goal of building three million a year. Every year, the government allocates budget for subsidised mortgages offering low down payments and cheap interest rates of 5% for low-income earners.

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