A protest against the exorbitant yield of Indonesian Government bonds

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Gede Sandra People’s Sovereignty Movement (Pergerakan Kedaulatan Rakyat) economist

IO – The interest rate – and therefore, the yield of Indonesia’s Government bonds – is still at a record high, far above the six countries of ASEAN (ASEAN-6). The Indonesian Government set a yield of 7.89% for a 10-year bond. Compare this to the Philippine Government, which only gave 3.5% yield, Vietnam 3.05%, Malaysia 2.87%, Thailand 1.18%, and Singapore 0.9%. In other words, Indonesia is the most “generous” country to money market investors. 

The question is, “Is this fair?” 

Based on credit ratings, which measure the risk of a country’s default on repayment of debt, the Indonesian Government does not carry the highest risk. According to Moody’s, the riskiest country – therefore, the one with the lowest credit rating – is Vietnam at BA3 (“speculative” grade investment). Indonesia and Philippines have the same credit rating of BA2 (medium). Thailand is rated slightly higher at BAA1 (medium), Malaysia is better at A3 (upper medium), with Singapore being the best at AAA –highest quality. 

How come Vietnam, as the riskiest debt repayment country, gives a lower Bond yield than Indonesia? Why does the Philippines, the one with the same credit risk as Indonesia, give a lower Bond yield than Indonesia? Logically, the riskier a country is, the more investors must be compensated with by a higher yield. Why does this not apply to Indonesia’s yield against Vietnam and the Philippines? 

The yield level of a Government Bond depends on the policy set by the Central Bank of the country. The Indonesian Ministry of Finance formulates the amount of the coupon (interest paid periodically once every 6 months or once a year) based on Bank Indonesia’s interest rate plus a fixed spread rate. Very well, let’s look at the Central Bank reference interest rate of each ASEAN-6 country. Is it so high? 

Actually, no: Vietnam’s reference interest rate is 5%, Indonesia 4.5%, Philippine 2.75%, Malaysia 2.5%, Singapore 1.26%, and Thailand 0.75%. Yet two countries, Vietnam and Singapore, can afford to give a lower Bond yield than the Central Bank interest rate in each country. 

What else shall we compare? GDP per capita? Indonesia’s GDP per capita in 2019 (USD 4,160.00) is higher than that of the Philippines (USD 3,400.00) and Vietnam (USD 2,185.00) – but lower than that of Thailand (USD 6,600.00), Malaysia USD 12,800.00), and Singapore (USD 63,879.00). If we just compare our situation with that of Vietnam and the Philippines, is it fair for a more prosperous country to provide a higher yield than that of less prosperous countries? This is absolutely illogical. 

All important means of comparison – credit rating, central bank rate, and GDP per capita – show that the yield of Indonesia’s Government Bond is unfair compared to those of ASEAN-6 countries. Indonesia should have a lower Bond yield than Vietnam, and about equal to that of the Philippines. But in fact, Indonesia’s yield is a full 3%-4% higher than that of the two countries. Even a 1% difference in Bond calculation is huge: It may represent a loss of tens of trillions of Rupiah, which our children and grandchildren must bear for decades ahead. 

In view of such a huge loss potential, it would be natural if people ask: “Is there a moral hazard here?” “Is the Government “flirting” with investment managers?” “Are there ‘kickbacks’ for policy makers in the Indonesian Government behind the high level of Government Bond yield?” 

Only our law enforcement officers can unearth the answer to these questions.