Burden sharing returns. During a hearing with Regional Representative Council (DPD) on 2 September, together with the MOF, BI revealed a plan of a new burden sharing policy to support government programs. However, this upcoming plan differs from the Covid-19 pandemic scheme, when BI purchased sizeable government bonds in the primary market at a zero-coupon rate. BI s exclusive debt switch with the MOF this year essentially delaying the payment of IDR104tn burden sharing bonds maturing this year has kept the MOF s excess cash balance (SAL) ample. Year-to-date, BI has purchased a total of IDR200tn in government bonds, including the debt switch amount. This allows the MOF to use SAL to help finance government programs at a cheap rate which we expect to reach IDR360tn by year-end. The government targets 80k cooperatives by end-October.

Mechanism of the new burden sharing. The new burden sharing means BI will essentially raise the interest rate of government deposits in BI s special account to offset the opportunity cost from funding government flagship programs with SAL at cheaper rate. The government will place SAL as deposits in SOE banks to provide additional liquidity so they can disburse loans for government programs such as Merah Putih village cooperatives and subsidized public housing. While the total placement is still uncertain, the MOF previously stated that around IDR83tn of capital injection to SOE banks would be allocated for Merah Putih village cooperatives in 2026 following the IDR16tn in 2025 (2026 Proposed Budget: Revenue Optimism Balances Aggressive Spending).

Interest rate sharing. BI Governor Perry Warjiyo suggested that the burden sharing rate is 2.15% for village cooperatives. This is calculated as the difference between the current 10y IndoGB yield (currently at 6.3%) and the 2% rate the government will receive from SOE banks for Merah-Putih village cooperative placement, then split evenly between BI and MOF. Technically, this means BI will add 2.15% interest on the remaining SAL deposit at BI for the same portion as allocated to the program. The burden sharing rate for the public housing program is set at 2.9%, which, in our understanding, means an additional rate for the remaining portion equal to the SAL channeled to that program. Currently, the government earns about 4% from its special account at BI or 80% of the BI Rate so placing funds in SOE banks at 2% implies about half of the usual rate.

Latest on village cooperatives. The MOF underlined the expectation that SOE bank lending rates should be capped at around 6% for village cooperative loans, reflecting affordable financing. The scheme will be jointly reviewed with the SOE Ministry, SOE banks, and in coordination with Danantara to ensure alignment and sustainability of the cooperative loan scheme. Regarding funding, the MOF clarified that the IDR83tn fund in question comes from government excess funds previously held at BI, i.e., SAL, which have now been withdrawn and placed in SOE banks for distribution.

Macro implications. As this scheme does not involve BI purchasing government bonds in the primary market, we see no credibility risk. We also expect limited liquidity impact from burden sharing itself, although the placement of SAL funds in SOEs may have a positive effect on money supply as liquidity returns to the banking system from BI s special account. We continue to expect BI to stay pro-growth given still-weak domestic demand and slower loan growth. We maintain our forecast for BI to cut the policy rate by another 50bp in this easing cycle. Indeed, during the hearing BI reiterated that there is room for further rate cuts to support growth, which BI expects to reach 4.7-5.5% in 2026 from an estimated 4.6-5.4% this year.