IMF Staff Country Reports

The Selected Issues paper discusses lessons for a changing investor base in Indonesia. The decision of different investors to hold local-currency (LC) government debt can reflect both global and domestic conditions. Results point to the importance of global factors especially for nonresidents (NRs), while domestic investor holdings are mostly associated with higher debt security issuances, and Bank of Indonesia acts as a residual financier under adverse conditions. Results are mostly robust to different specifications. The results suggest that NR holdings of LC debt support the bond market and domestic credit, but financial market volatility may be higher. The paper finds that domestic banks and nonbanks are typically the marginal investors of new LC debt issued in emerging markets (EM). In normal times, domestic banks and nonbanks absorb most of the new issuances of LC debt in our sample of EMs. However, domestic nonbanks assume the key role in absorbing new debt supply during episodes of large declines in the NR share of LC debt. This finding is important for Indonesia, given the limited role of domestic nonbanks in the economy. In this context, further deepening of the domestic retail investor base, in line with the Indonesian authorities’ medium-term debt strategy, could support market depth and reduce volatility.