BSF Value Needs Evaluation Amid Rupiah Weakening - BCA Securities
The Chief Economist of Trimegah Securities Indonesia, Fakhrul Fulvian, believes that the Bond Stabilization Fund (BSF) needs to be carefully evaluated if its objective is to assist in stabilising the rupiah exchange rate. He noted that Indonesia’s primary challenge is no longer maintaining low government bond yields, but rather restoring the function of the financial market to attract the capital inflows required to strengthen the balance of payments and support the rupiah.
“I am concerned that we are trying to solve the rupiah problem with the wrong instrument. What the market needs right now is a normal yield curve, not one that is continuously held and stabilised administratively,” Fakhrul stated in Jakarta on Wednesday.
He explained that Bank Indonesia (BI) has taken a significant step by raising the benchmark interest rate by 50 basis points, signalling that exchange rate stability is now a top priority. However, this policy could lose effectiveness if the bond market is simultaneously forced to maintain long-term yields at excessively low levels. “Bank Indonesia has sent a very clear message to the market through the 50 basis point rate hike. However, if the yield curve remains flat or even inverted, that message becomes inconsistent. The market will ask: does Indonesia want to defend the rupiah or defend government borrowing costs?” he continued.
According to Fakhrul, Indonesia’s current yield curve is one of the flattest in recent years, with short-term and long-term bond yields at nearly identical levels. Normally, investors should receive higher compensation for long-term placements. He noted that such conditions reduce Indonesia’s attractiveness to global investors at a time when additional capital inflows are desperately needed.
Fakhrul explained that the root of Indonesia’s current issue lies in the balance of payments. Rising energy imports, increased foreign exchange needs in the private sector, and global uncertainty have significantly heightened domestic demand for foreign currency. Since the primary sources of foreign exchange are exports, direct investment, and portfolio investment, the ability to attract inflows is becoming increasingly vital.
“Ultimately, domestic dollar demand must be matched with incoming dollar supply. If foreign exchange needs increase while we make Indonesian financial assets less attractive, pressure on the rupiah will persist,” he explained. Government bond markets have traditionally been a key instrument for attracting foreign funds, but this mechanism only works if investors receive adequate risk compensation.
Furthermore, the current market landscape differs greatly from a decade ago when foreign ownership of Government Securities (SBN) was much higher. Currently, foreign ownership has dropped drastically, meaning the benefits of maintaining low yields are no longer as significant, while the economic cost of losing financial market attractiveness is growing.
Fakhrul even suggested that if the goal of the Bond Stabilization Fund is to support the rupiah, the policy could potentially produce the opposite effect. “If the end goal is to strengthen the rupiah, then suppressing yield increases could be counterproductive. The rupiah needs inflows. Inflows need attractive assets. Attractive assets need healthy price discovery,” he said.
He believes now is the opportune moment for the Ministry of Finance to adjust its policy direction. Following Bank Indonesia’s hawkish move, fiscal policy and bond market management should provide aligned support. Stability for the rupiah cannot be achieved solely through foreign exchange interventions or interest rate hikes; it is more important to ensure a healthy balance of payments. “The rupiah is ultimately a reflection of the balance of payments. If we want a stronger rupiah, we must ensure Indonesia remains an attractive investment destination. This can only be achieved if our financial markets function normally,” concluded Fakhrul.