Economist highlights potential and risks of Indonesia's Merah Putih Bond

Indonesia's financial market may see significant deepening with the introduction of the Merah Putih Bond, a new financing instrument designed to provide long-term capital outside traditional sources like the state budget, bank loans, and government securities. Economist M. Rizal Taufikurahman from the Institute for Development of Economics and Finance (INDEF) believes the bond holds the potential to expand the nation's financing capacity by attracting long-term funds for productive projects.

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Merah Putih Bond has the potential to deepen the market if it truly creates new long-term financing sources beyond the state budget, banking credit, and government securities.

Rizal explained that the Merah Putih Bond could draw investments from sources such as pension funds, insurance companies, institutional investors, and the general public. This influx of capital could strengthen Indonesia's overall financing capabilities, reduce reliance on short-term funding, and decrease dependence on external financing. The aim is to channel these funds into strategic and productive initiatives that support national development goals.

However, Rizal cautioned that the bond's success should not be measured solely by the amount of money raised. True market deepening requires a broader impact, including expanding the investor base, enhancing liquidity in the secondary market, lowering capital costs, and providing substantial additional financing for key sectors. He warned that if the underlying projects lack clarity, have weak cash flows, or suffer from poor governance, the bond might merely shift existing funds rather than create new ones, leading to only superficial market deepening.

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If the underlying projects are unclear, cash flows are weak, and governance is not transparent, Merah Putih Bond risks merely shifting funds from government securities or other corporate bonds, making the impact on market deepening only superficial.

To ensure the bond's effectiveness and mitigate potential risks, Rizal recommended that the government offer incentives. These could include competitive tax rates on coupons, market maker facilities, appropriate prudential treatment for institutional investors, and stringent transparency and reporting standards for the projects funded by the bond. Crucially, he advised against implicit guarantees or excessive privileges for the bond, as these could foster moral hazard and increase contingent liabilities for the state budget, ultimately posing fiscal risks.

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The government should not provide implicit guarantees or excessive privileges because they could create fiscal risks.