JAKARTA: Indonesia's central bank will no longer regularly sell its six-month SBI debt in monthly auctions in an attempt to drive investment to longer-term instruments, as emerging markets around the world seek to counter hot money flows.
Bank Indonesia (BI) will focus on nine-month SBIs in Wednesday's auction and issue a six-month term deposit this week, while aiming to sell a nine-month term deposit at a later date, deputy governor Budi Mulya said on Wednesday.
Term deposits -- which are not tradeable and must be held to maturity -- and short-term deposit facilities (FASBI) will replace SBIs to absorb excess liquidity in the financial system, analysts said.
Authorities are trying to smooth volatility in short-term instruments amid fears that any sharp outflow of funds could threaten stability and the rupiah.
Indonesian stocks, bonds and the currency fell last month as investors took profits from a strong rally in 2010 and worried that the central bank was behind the curve in tackling growing inflationary pressures.
Mulya said he expected the rupiah to strength to above 8,900 to the dollar in coming months, from around 8,915 currently, and that inflation could rise above the target of 4-6 percent this year.
The central bank last week hiked its key policy rate by 25 basis points to 6.75 percent, surprising many market watchers, in an attempt to head off price pressures. SBIs are expensive for BI because the yields are based on its benchmark interest rate.
In a BI auction last month, the weighted average yield for six-month SBIs was 6.1 percent and for nine-month SBIs was 6.5 percent.
"Efforts to shift excess liquidity that is piling up in short tenors to longer tenors are expected to reduce the dependency of market players on placing short-term funds in BI's monetary instruments, supporting financial deepening," said BI spokesman Difi A. Johansyah.
BI introduced a 28-day minimum holding period for its SBIs in June last year, driving investors out of a one-month tenor that had been popular for its high yields and liquidity and towards three- and six-month tenors and government debt.
It then stopped selling three-month SBIs in November last year. It has issued term deposits as replacement, with a five-month term deposit first introduced last month.
"This is BI's scenario to eventually eliminate SBIs. In effect, foreigners can't put in funds that may destabilise the rupiah," said Juniman, an economist at Bank Internasional Indonesia in Jakarta.
"They will move to the bond market then, which will be positive to finance the state budget and in driving the real sector."
Analysts see the government can start issuing T-bills with maturity below one-year once the central bank stops issuing SBIs.
"The government shouldn't be too afraid on refinancing risks by issuing shorter-dated T-bills. The instruments are needed by banks," said Anton Gunawan, an economist at Bank Danamon in Jakarta.
Ultra-low interest rates in developed markets have been driving a flood of money towards emerging markets where yields are higher, leading countries from Taiwan to Brazil to impose capital controls to stem the rise in their currencies.
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