(Bloomberg) -- Indonesia is planning to sell bonds to its citizens living overseas as Southeast Asia’s largest economy seeks to expand its funding pool and reduce the dependence on foreign fund inflows for financing a budget deficit.
The government is studying the so-called “diaspora bonds,” which will target non-residents from migrant workers to students, according to Luky Alfirman, director general for financing and risk management at the finance ministry. Details of the type of debt instrument, its tenor, denomination and transaction costs are being still discussed, he said.
The diaspora bonds are part of the plan to reduce high foreign ownership of Indonesian securities that makes the nation one of the most vulnerable emerging markets. The government raises about $10 billion annually from overseas selling dollar, euro and yen denominated securities and sukuk. The government also sees “enormous” potential in boosting domestic retail ownership of sovereign bonds from about 3% now, Alfirman said.
“Our migrant workers also need an investment instrument,” Alfirman said in an interview in his office on Thursday. “We can set the minimum purchase at 1 million rupiah ($71) for them, just like the model we use for our retail savings bond” and securities can be in denominated in dollars or rupiah, he said.
While Indonesians in the Middle East may prefer sukuk and those in Japan or the U.S. might like with the conventional securities, authorities are still working to “find the best possible scheme,” Alfirman said. Indonesian expats may total about 8 million, official data show.
While Indonesia needs portfolio investment to finance its development, high foreign ownership makes the country vulnerable to capital outflows during periods of volatility, Alfirman said. Foreign ownership of rupiah-denominated sovereign notes, which make up more than 80% of the bonds sold annually is at more than 39%, official data show.
“The government plans to gradually decrease foreign ownership in bonds, not by limiting it, but by expanding domestic investors base,” Alfirman said, adding the ministry will stick to its strategy of issuing more rupiah-denominated bonds to mitigate risks coming from global volatility.
With the budget deficit forecast to widen to 1.93% this year, the government may issue additional bonds or seek loans to finance the shortfall, Alfirman said, adding it has the room to consider another global bond sale if needed.
The government has met 71% of this year’s gross borrowing target of 825.7 trillion rupiah by July 17, according to finance ministry data.
To attract more domestic investors, Indonesia is also reviewing the tax rates applicable on all financial market instruments, including bonds yield, Alfirman said. Finance Minister Sri Mulyani Indrawati last month said the government will slash the income tax on gains from infrastructure bonds to 5% from 15%.
“The window to review the tax treatment is open because we are now in the process of amending the Income Tax Law,” Alfirman said.
(Updates with bond sale target in ninth paragraph.)
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