Indonesia Plans Large Bond Issuance for Housing Program with Central Bank Support

Indonesia is preparing a substantial bond offering to finance President Prabowo Subianto's ambitious public housing initiative, with the central bank pledging secondary market purchases of the debt.

Bond Sale Details

The bond issuance aims to bolster the government's home ownership loan program. Finance Minister Sri Mulyani Indrawati provided no details on the issue size. However, Housing Minister Maruarar Sirait indicated a sizable issuance, with final figures still being determined. It remains unclear whether the sale is part of the government's $40 billion borrowing plan for this year.

Central Bank Support

Bank Indonesia intends to purchase over $9 billion of government bonds in the secondary market, including the housing-linked bonds. The central bank currently holds approximately 25% of Indonesian government local bonds, a high percentage among Asian peers. This move highlights the involvement of both fiscal and monetary policymakers in supporting the President's economic agenda, raising concerns among investors.

Market Concerns

Portfolio manager Rajeev De Mello of Gama Asset Management SA expressed apprehensions about the pre-commitment to purchase specific housing market-related bonds, citing the lack of macroeconomic stress or liquidity issues. De Mello cautioned that monetizing the debt could raise concerns among foreign investors and exert pressure on the rupiah, potentially undermining Indonesia's financial stability.

Additional Measures

In addition to the bond plans, Bank Indonesia will lower reserve requirements for banks providing mortgage loans, increasing liquidity incentives for the housing sector to approximately $4.9 billion. The finance ministry is implementing $19 billion in government spending cuts to reallocate funds for Prabowo's priority programs.

Program Financing

Previously, the government allocated $1.7 billion for subsidized mortgages, covering only 220,000 houses. This is significantly below Prabowo's target of constructing 3 million homes annually. The government provides subsidized mortgages with low down payments and low interest rates (5%) for low-income earners.