Development of Indonesian

Debt Markets

Hendar,

Director of Directorate of Monetary Management

Bank Indonesia

November 2009

Outline

1.Recent Development of Indonesian Debt

Market

2.Repo Debt Market and Settlement system

3.Future enhancement and Challenges

East Asian debt Market Overview

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Source: ADB

• Emerging East Asia has stepped up from the worst of economic recession and financial market instability

• Asia’s local currency bonds outstanding grew significantly in the first half of 2009

Indonesian Debt MarketIndonesian Gov’t Bond (SUN) Market

4

The Outstanding of Government Bond and Treasury Bills

The Outstanding of Government Bond and Treasury Bills by maturity

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2004 2005 2006 2007 2008 2009-end Oct

bio Rp FR VR HB ORI ZC TB

0

50

100

150

200

250

300

350

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Rp Trillion

> 10 yr 5-10 yr < 5 yr

Indonesian government bond market has grown very rapidly. As of the end of October 2009, the outstanding of government bond is Rp539.81 trillion and of treasury bills is Rp24.7 trillion.

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Indonesian Gov’t Bond (SUN) MarketSecondary Market & Turn Over Ratio

• Total volume of government bonds traded in the secondary market has reached the highest in 2007 of Rp1,468.40 trillion in 65.966 transactions.

• Turnover ratio of Indonesian Government Bond has increased from 0.29% in 2000 to 1.56% in 2007.

0

100

200

300

0.0

2.5

5.0

7.5

2004 2005 2006 2007 2008 2009-end

Oct

Rp t Vol per day (lhs) Freq per day (rhs)

0.00%

0.50%

1.00%

1.50%

2.00%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

-e

nd

Oc

t

Turn Over RatioIndonesian Government Bond Secondary Market

6

5%

8%

10%

13%

15%

1 2 3 4 5 6 7 8 9 10 15 20 30

30/9/08 31/12/08 30/10/09 31/8/09

0

200

400

600

800

1,000

1,200

8%

9%

10%

11%12%

13%

14%

15%

Jan FebMar AprMayJun Jul AugSep Oct

bpYield SUN dan CDS Indonesia

SUN-10th (lhs) CDS Ind-5 th (rhs)

Indonesian Government Bond Yield Indonesian Government Bond Yield and CDS Index

• The yield curve shifted downwards in October 2009 from December 2008 level, for all maturities.

• Indonesia’s CDS index has decreased to 193 in October 2009 from 638 bps in December 2008.

Indonesian Gov’t Bond (SUN) MarketYield & CDS Index

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Players GB TB Total %Non-Resident 100.60 0.73 101.33 17 Banks 240.95 13.03 253.98 42 Insurance 66.68 0.66 67.33 11 Pension Fund 35.88 0.95 36.83 6 Mutual Fund 42.41 44.00 86.41 14 Bank Indonesia 16.28 7.88 24.15 4 Others 37.02 1.42 38.44 6 Total 539.81 68.66 608.47 100

The Ownership of Indonesian Government Bonds and Treasury Bills (in Trillion Rp)

Indonesian government bonds and treasury bills are ownedmainly by banks. As of the end of Oct, banks’ ownershipreached 42% while the others’ were between 4%-17%.

Indonesian Gov’t Bond (SUN) MarketOwnership

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Indonesian Corporate Bond

MarketOutstanding & Secondary Market

0

30

60

90

2005* 2006 2007 2008 2009-Oct

Rp T Issuance Outstanding

0

40

80

120

160

200

0

100

200

300

400

500

2/2 17/3 1/5 15/6 30/7

Rp m Vol (lhs) Freq (rhs)

*No issuance data

The Issuance & Outstanding of LCY Corporate Bond Indonesian Corporate Bond Secondary Market

Corporate bond market has shown significant improvement in 2009, due to the trend of decreasing interest rate and conducive economy after global financial crisis.

Indonesian Repo MarketDevelopment

9

Interbank Call Money and Repo Rate

• Asymmetric information in the market drives market’s perception not well-developed, which is reflected from the pricing.

• In Indonesia, repo rate is higher than the interbank money market rate for the same maturity.

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Indonesian Repo Market

Cont’dDevelopment

0

0.02

0.04

0.06

0.08

0.1

0.12

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 Q3/09

%Rp Trillion

volume Turnover Ratio (rhs)

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 Q3/09

Rp Trillion

Repo SUN

Outright SUN

PUAB

Volume and Turnover Ratio of Repo SUN Daily Average of Repo SUN, Outright SUN, PUAB

• Since the implementation of MRA in 2005, volume and turnover ratio of government bond (SUN) repo transaction have relatively increased.

• In money market, short term liquidity needs are majorly fulfilled in the interbank money market (PUAB) rather than in the SUN repo market.

Settlement SystemDevelopment

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• Since Feb’2004, Bank Indonesia has been putting into operation Bank Indonesia Scripless Securities Settlement System ( BI-SSSS) to facilitate online settlement of book-entry government securities and SBI (Central Bank Certificate)

• Benefits of using BI-SSSS among others are :

- Reduce the time, cost and human resources

- Reduce settlement risk

- Increases the volume of secondary market securities trading

- Facilitate securities transactions between market players and Bank Indonesia in the open market operation

Monetary OperationGov’t Bond as Underlying Asset

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I t e m Note

S B I

- Auction system VRT for all auctions of SBI

- Maturity 1, 3, 6 and 9 months

- Incremental Bidding 0,01% or1 bp

- Pricing FMV FMV

FINE TUNE OPERATION (FTK & FTE)

- Auction system VRT

- Frequency Active: up to twice a day , morning and

afternoon session

- Collateral for FTE SBI & SUN, plafond 100%

- Maturity Up to 3 mo

- FX Swap Available up to 1 yr

STANDING FACILITY

- Window Time FASBI : 16:00 – 17:00 WIB

Repo : 16:00 – 17:00 WIB

- Collateral for Repo SBI &SUN, plafond 100%

HAIR CUT

- For FTE and Repo: SBI 0% ; SUN 5%

RR SUN

Auction system VRT

-Maturity o/n – 1 yr (now 3wk & 2 mo)

-Frequency Weekly

-Pricing FMV

Bank Indonesia Monetary Operation Instruments

In part of developing the market, Bank Indonesia has been implementing monetary operation using government bond.

Future EnhancementInfrastructure, eligible asset and participant

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• Develop infrastructure of Repo market

- General Master Repo Agreement (GMRA), Indonesian annex

• Intensive socialization to the debt market participants as well as related parties

• Enhanced eligible assets and market participant in the monetary operation of the central bank

Future EnhancementEnchanced Settlemet System

• Upgrade the settlement system to so called “BI-RTGS/SSSS 2nd Generation”.

• Main objectives of this enhancement are:

- To increase performance and robustness of BI-RTGS (Real Time Gross Settlement) and BI-SSSS in connection with increasingly growth of volume of transactions processed in BI-RTGS and BI-SSSS

- To standardize infrastructures and harmonize operation of the both funds and securities transfer systems

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Future Enhancement Cont’dEnchanced Settlemet System

• To improve compliance of system operation with international standards (e.g. BIS CP SIPS and IOSCO Recommendations) and practices;

– To facilitate and increase efficiency of cross-border financial markets transactions following growth of financial globalization, including development of single market in a region such as ASEAN economic community (AEC) in 2015

– To facilitate the development of domestic integrated financial market infrastructures

• To anticipate changes in policy with regard to securities transactions and product development in financial (securities) markets.

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Future Enhancement Cont’dSome challenges

• Ample excess liquidity in the money market

» Less incentive to develop debt market

» Market segmentation, prefer transaction with central bank to other market participants

» Outstanding SBI (Central Bank Certificate) jumped to more than Rp.300 trillions ( USD 30 billions)

• Limited number of investor as well as issuer of debt securities

» Most of investors prefer to deposit their money in the banks

» Bank loan still as main source of corporate financing

• Limited debt market instrumen

» Currently heavily rely on govt.bond. Others debt instrument (such as CPs, PNs and MTNs) not yet developed.

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Thank You

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