Bank Indonesia Expands Monetary Policy Tools

Opening Repo Access for Corporate Bonds

Bank Indonesia (BI) has taken a significant step in expanding its monetary policy instruments by opening the possibility of using corporate bonds as collateral for repurchase agreements (repo). This move is designed to enhance liquidity in the financial market and ultimately support financing for the real sector. The new policy begins with accepting bonds issued by PT Sarana Multigriya Finansial (SMF), a state-owned financial institution, as repo collateral in the secondary market.

Rationale and Potential Impact

The decision to include corporate bonds in repo transactions is expected to have multiple positive effects on the financial market. First, it is likely to increase demand for corporate bonds as they become more attractive to investors who can now use them for short-term funding through repo transactions. Second, as demand rises, the yields on these bonds are expected to decrease, making them a more competitive financing option for corporations compared to traditional bank loans. Third, this policy creates a new liquidity chain in the financial market, allowing banks and non-bank financial institutions to access funds more easily through repo transactions with primary dealers, who in turn can repo these bonds with BI.

Expert Views on the Policy

David Sumual, Chief Economist at PT Bank Central Asia Tbk. (BBCA), notes that this policy gives BI an additional tool for monetary transmission. He highlights four key potential benefits: increased demand for corporate bonds, lower yields making bond issuance more attractive for companies, enhanced monetary policy transmission, and improved corporate governance and credit ratings as companies strive to meet BI's standards for eligible bonds. However, Sumual also cautions about the risks associated with corporate bond defaults, emphasizing the importance of BI's categorization and rating processes.

Implementation Details

Agustina Dharmayanti, Head of Financial Market Development Department at BI, explained that the initial phase involves accepting corporate bonds issued by SMF due to their high credit rating and liquidity. She noted that other corporate bonds could be included in the future if they meet the criteria set out in Law No. 4/2023 on Financial Sector Development and Strengthening (UU P2SK) and subsequent BI regulations. These criteria include being tradable, registered in the monetary operation participant account, actively traded, having a high rating (minimum AAA), and not being encumbered.

Broader Context and Future Implications

Fitra Jusdiman, Head of Monetary and Securities Management Group at BI, highlighted that traditionally, central banks in many countries accept various types of bonds, including corporate bonds, as underlying assets for repo transactions. In Indonesia, however, the corporate bond market remains underdeveloped, with corporate bonds valued at only 2.1% of GDP, significantly lower than in countries like South Korea (60.7%), Singapore (27.06%), or Japan (16.8%). By following international practices and expanding the range of eligible collateral, BI aims to deepen the corporate bond market and provide businesses with alternative, potentially more efficient funding sources beyond traditional bank loans.

Conclusion

BI's decision to expand repo eligibility to corporate bonds represents a strategic move to enhance financial market liquidity and support real sector financing. While there are potential risks, particularly related to default, the careful selection criteria and ongoing oversight by BI are designed to mitigate these concerns. As the policy develops, it is expected to contribute to a more diversified and robust financial system in Indonesia.