To mitigate the pandemic’s harmful effects, Indonesia has redirected $49 billion from its fiscal budget for 2020 to healthcare, social assistance, and small enterprises. The fiscal capacity to fund long-term climate goals was reduced as a result of this reallocation. This lower capacity could compromise Indonesia’s goal of completing its energy transition: Indonesia’s required National Energy Policy calls for a 23 per cent renewable energy contribution in the country’s energy mix by 2025.

Green bonds – sovereign bonds with positive environmental and/or climatic benefits that may be issued by subnational governments with enough fiscal ability to borrow – are one possible answer. Despite their possibilities, municipal green bonds have yet to be issued in Indonesia’s capital market due to a number of constraints. The most significant problem continues to be bureaucratic procedures.

The Climate Policy Initiative’s report titled “Improving Renewable Energy Finance in Indonesia” proposes the use of municipal bonds to support Indonesia’s energy transition targets by analysing the overall feasibility of implementing such bonds. This is an extract of the report sourced from REGlobal.

More than two-thirds of ASEAN green bonds were utilised to fund renewable and energy efficiency projects. This is in contrast to the worldwide trend, in which green construction projects account for 18 per cent of global green bond revenues, following renewable energy generation. Meanwhile, in terms of issuers, ASEAN has a greater proportion of government bonds (58 per cent) than the rest of the world (39 per cent).

Indonesian green bond market (timeline)

Indonesia plans to cut emissions by 23 per cent between 2010 and 2030, and by up to 41 per cent with international support. Renewables are also expected to account for 23 per cent of total primary energy production by 2025, and 31 per cent by 2050. The sustainable finance framework, as well as the green bonds and green sukuk framework, were released by the financial services authority (OJK) in 2017. The climate budget tagging system will be used to identify project pipelines that match with Indonesia’s climate goals in bonds or “sukuk” issued by the Indonesian government. The regulatory system in Indonesia permits the issuing of municipal bonds subject to rigorous fiscal capability and reserve fund requirements.

Green Islamic bonds (sukuk) were first issued by the Ministry of Finance in 2018, while the first corporate green bonds were issued by PT. Sarana Multi Infrastruktur (SMI), Indonesia’s infrastructure finance business, in the same year. Government-issued bonds, as well as quasi-government-issued bonds, are regarded as secure investments with excellent credit ratings.

For instance, in 2018, PT. SMI received an AAA rating for a $208 million bond with a term of three-five years and a coupon rate of 7.55 per cent and 7.8 per cent. The administration of West Java, one of Indonesia’s most developed provinces, sought to sell municipal bonds before the Covid-19 crisis, but the plan was denied by the House of Representatives. The central government promotes the issue of green bonds in Indonesia, but this has not yet spread to local governments.

Procedures to issue municipal bonds

Local governments must meet specific standards to be able to issue municipal bonds, according to Ministry of Finance regulations. Municipal bonds differ from central government bonds in that they are not guaranteed by the federal government’s budget and cannot be used to raise funds in foreign currency. The local government, as a bond issuer, is responsible for paying the principal and interest on each municipal bond when it matures, as well as penalties for late payment of the principal and interest. Every year, until the conclusion of the payback period, payments are budgeted in the APBD.

Subnational governments that want to issue bonds must meet four standards outlined in Ministry of Finance regulation no. 146/ 2006, which pertain to issuance procedures, accountability, and the public disclosure of municipal bond information.

  1. Prudent loan amount: The loan amount drawn must not exceed 75 percent of the previous year’s subnational revenue, as stated in the annual budget.
  2. Demonstrated ability to repay debts: The debt service coverage ratio (DSCR) demonstrates the municipal government’s ability to repay debt. In order to receive loans, local governments must have a minimum DSCR of 2.5, according to Government Regulation No. 56/ 2018 on municipal loans.
  3. No existing arrears: There must be no existing defaults on loan repayments to the federal government by the local government.
  4. Passed financial audit: The state audit agency must have given local governments a fair rating on their financial audit. In 2019, 485 regional governments and all provincial governments received “WTP,” exceeding government mid-term planning goals, according to the state audit agency.

Why municipal bond issuance failed to happen in the past

The failure of municipal bond issuance in Indonesia can be attributed to a variety of factors. In Indonesia, the market is shallow, which means there are few potential buyers. Aside from that, the Jakarta government cited the 2008 financial crisis as a cause for deferring the issuance of their bond in that year. Low public financial management capacity and low creditworthiness are the two most frequently highlighted issues in terms of local government preparation. At the time, the Jakarta government’s balance sheet was insufficient to get an AAA rating. As a result, the market required a high coupon rate to cover the risks, discouraging the Jakarta government from issuing the bond.

After establishing that local budget reallocation was seemingly enough to fund the projects they sought, the Jakarta administration terminated their bond sale plan in 2012. After the central government agreed to fund the airport expansion, the West Java government cancelled their bond offering plan for Kertajati airport.

Other Indonesian local governments find it difficult to hold a public exposure for potential investors because they are not used to being questioned about their financial accountability. Furthermore, there is a lack of common understanding among local officials, who are unsure how to effectively interpret and implement the content of the regulations.

Current situation

Green awareness in the industry is poor, according to market participants. Because of the regulation, some people have started to have green portfolios. Investors were also found to have little knowledge about or experience with renewable energy.

In addition, participants identified situations when the government’s regulations were confusing or overlapping. Investors are deterred from integrating green assets in their annual portfolio requirement due to these issues. Market participants expect clearer, more uniform, and synchronised green laws to address this. They also want to see significant possibilities for green projects in Indonesia, as indicated by the central government’s green bond issuance precedents. They believe that the government’s “signalling action” will increase their willingness to consider green bonds in Indonesia.

Many market participants feel that there aren’t enough profitable renewable projects in the pipeline for municipal governments and that the Indonesian financial services authority may demand the underlying project to run first, even before the bond is issued, to ensure that the project is real. Since the existing policies and regulations have limited ability to improve the market demand, market participants offered certain recommendations to the municipal governments:

  1. Green bonds should only be issued if there is a significant need for funding, and specifically if international investors with more money and a greater desire for aggressive trading can participate in the market. If the requirement for finance is limited, it is not worth it to issue green bonds because the cost outweighs the benefit.
  2. The municipal government should offer the green bond to quasi-government entities first, such as state-owned banks in the area. This may secure a minimal number of bond buyers and reduce the government’s concerns regarding the bond’s complete sale.
  3. Municipal governments should sell the bonds first to BPJS, the country’s largest state-owned pension and insurance company. The designated base investor should be BPJS. Other smaller pension managers and insurance companies will be more enticed to enter the market once there is a clear and sizeable investor base.
  4. Bonds having short maturity are preferred by securities companies, banks, and investment banks. Municipal governments should instead sell their green bonds to pension funds and insurance companies, who are willing to accept bonds with long maturities.


As part of its National Energy Policy, Indonesia has set a goal of increasing its renewable energy mix to 23 per cent by 2025. In addition, the government has vowed in its nationally determined contribution (NDC) statement to reduce greenhouse gas emissions by 29 per cent by 2030. These two programmes urge Indonesian local governments to make renewable energy a priority in their regional energy plans. Local governments, on the other hand, face a major financial hurdle in developing more renewable energy.

Issues of municipal bonds have challenges from both the demand and supply sides. On the supply side, there are a limited number of successful renewable energy projects in the pipeline, as well as unskilled bond-dealing bureaucrats. On the demand side, market participants acknowledge a lack of green awareness in the industry and are unsure about government rules. Several recommendations are given to the government to overcome the issues at hand. At the moment, it is up to the government to decide whether to use these or to develop its own effective policies.