Legislating debt<\/p>\n
It is hard to understand why President Megawati Soekarnoputri
\nhas not yet ratified the law on government debt instruments more
\nthan one month after its enactment by the House of
\nRepresentatives. That only further reflects the lack of a sense
\nof urgency on the part of the government in its economic-crisis
\nmanagement.<\/p>\n
There is no legitimate reason whatsoever for delaying the
\nenforcement of the law, especially since the legislation had
\noriginally been planned to come into force in June to provide
\nstronger legal foundations for government borrowing from the
\ndomestic and international financial markets.<\/p>\n
The government has set November as the new schedule for the
\nissuance of treasury bills and treasury bonds to refinance the
\nbonds issued by the government in 1999 and 2000 to recapitalize
\nbanks. But this new schedule is again quite doubtful now after
\nthe delay in the ratification of the law.<\/p>\n
The law should be welcomed as the first legal foundation for
\nthe public sector's borrowing as it governs all matters
\npertaining to government debt instruments whether they are
\ntreasury bills or such longer-term promissory notes as treasury
\nbonds.<\/p>\n
The law reaffirms the people's control of the public sector's
\nborrowing by requiring the government to obtain House approval
\nfor the issuance of debt instruments. Funds for bond interests
\nand redemption have to be allocated in the annual state budget.<\/p>\n
Equally important are the stipulations that oblige the
\ngovernment to consult the central bank (Bank Indonesia) before
\nfloating debt instruments.<\/p>\n
Consultations between the government and Bank Indonesia are
\nindeed essential to better coordinate fiscal and monetary
\npolicies because treasury bills or treasury bonds will be issued
\nnot only to raise funds for the state budget but also to serve as
\nthe benchmarks for short and long-term interest rates.<\/p>\n
The country, at present, does not have debt instruments that
\ncan function as the real market benchmarks for short and long-
\nterm interest rates. Bank Indonesia Certificates of Deposits
\n(SBIs) of one to three month tenures do serve as a benchmark for
\nworking capital loans (short-term loans), but these instruments
\nare fundamentally a monetary intervention instrument used to
\nabsorb excess liquidity from the banking system.<\/p>\n
The government issued more than Rp 646 trillion (US$72
\nbillion) in fixed and variable-rate bonds to bail out the banking
\nindustry in 1998-2000. But none of these bonds can function as a
\nbenchmark for long-term interest rates because they were issued
\nat par directly to the buyers, not through competitive bids.
\nThese bonds do not reflect the sovereign risk and therefore are
\nnot attractive to investors.<\/p>\n
A government benchmark is needed to give bond investors a
\nrealistic and computable assessment of risk. Without a risk-free
\nreference parameter given by the sovereign entity, the relative
\nrisk profile of ordinary debtors like corporations or banks
\ncannot be quantified. If risks cannot be quantified, learned
\ninvestors may avoid the market altogether.<\/p>\n
The legislation will help provide more depth to the financial
\nmarket because government bonds will become more attractive as
\nlong-term investment vehicles for such institutional investors
\nwith long-term liabilities as pension funds and insurance
\ncompanies. At present, domestic pension funds and insurance firms
\nstill invest the bulk of their funds in bank time deposits.<\/p>\n
However, the objective of creating benchmark interest rates
\nwill not materialize if the secondary bond market remains
\nmoribund as it is now. Additionally, investors are not interested
\nin holding instruments with little or no liquidity.<\/p>\n
The new legislation therefore also stipulates rulings on the
\nestablishment of market infrastructure to facilitate the
\ndevelopment of secondary markets to make bonds highly liquid. It
\nspecifically governs the role of Bank Indonesia in developing the
\nbond market, especially the clearing and settlement system, to
\nensure timely settlement of bond trades.<\/p>\n
However, the enactment of the law is only the first, though
\nvery important, step towards the development of a viable market
\nfor government debts. Certainly, the law has yet to be
\nsupplemented with regulations on such technical details as the
\nrole of Bank Indonesia as the central registry and the
\nestablishment of other market infrastructure such as trading
\nsystems and rating agencies.<\/p>\n
Yet more important is the establishment of an efficient
\nclearing and settlement system for bond trade and book-entry
\nregistry, rather than physical delivery of bonds, to facilitate
\nsmooth bond trade but with minimum risks.<\/p>\n
As Indonesia now has only one rating agency (Pefindo), which
\ndoes not yet have official international accreditation,
\ngovernment bonds have to be rated by international institutions
\nto attract foreign investors as it is these ratings that will
\nprimarily set the bonds' discount rates.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/legislating-debt-1447893297",
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"sponsor": "Okusi Associates",
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