Reviving the bond market<\/p>\n
The government seems confident macroeconomic and political
\nconditions next year will augur well for reopening the secondary
\nbond market, which has been lifeless since late-1997 when the
\nrupiah crashed and inflation spiraled out of control. Central
\nbank deputy governor Miranda Gultom confirmed on Monday Bank
\nIndonesia would begin allowing in February state and private
\nbanks to trade treasury bonds which were issued this year to
\nfinance the banks' recapitalization.<\/p>\n
The government issued Rp 260 trillion (US$37.1 billion) in
\ntreasury bonds between May and October to recapitalize state,
\nprivate and regional development banks, and repay liquidity
\ncredits from the central bank. Another Rp 150 trillion in
\ntreasury bonds will be floated early next year to recapitalize
\nseveral more state and private banks. But only about Rp 350
\ntrillion of these bonds will be tradable; Rp 53.8 trillion worth
\nof index-linked bonds, which were issued to the central bank in
\nMay to repay its liquidity credits, will remain in its vaults,
\nnot seeing the light of day until they are redeemable 20 years
\nfrom now.<\/p>\n
Allowing the T-bonds to be traded on the secondary market will
\ninject sorely needed liquidity into recapitalized banks, enabling
\nthem to resume lending, which is the lifeblood of economic
\nactivity. The recapitalized banks have so far been unable to
\nresume lending on a significant level, because their only real
\nliquidity is coming from the interest on the bonds.<\/p>\n
The debt papers, prohibited from being traded, have simply
\nbeen sitting on their balance sheets as quasi capital to meet the
\nminimum capital adequacy ratio of 4 percent. Even without this
\nban, however, no one would touch the debt instruments this year
\ngiven the volatile rupiah rate, persistently high interest rates
\nand adverse economic and political conditions.<\/p>\n
In fact, seen from the structure and tenor of the bonds, the
\ndebt instruments are marketable only if there is political
\nstability and improved macroeconomic conditions. The coupon rates
\non the three types of bonds -- fixed-rate, floating-rate and
\nindex-linked -- have been set at such levels that the instruments
\nwill be attractive to investors only if there is low inflation
\nand a stable rupiah.<\/p>\n
Anticipating analysts' concern that interest rates, which have
\nsteadily declined since March, might skyrocket if the market was
\nsuddenly flooded with unwanted debt papers, Gultom pledged the
\ncentral bank would seek to limit any negative impact by ensuring
\norderly trading of the bonds.<\/p>\n
Market stability could in fact be threatened if all bond-
\nholding banks decided to unload the bulk of their debt papers at
\nthe same time, meaning bond yields would have to be jacked up to
\nattract buyers for such a massive offer. The central bank could
\nprevent sudden rises in interest rates by buying up the bonds,
\nbut such a move would be a marked reversal of its tight monetary
\npolicy, which has underpinned the steady decline in inflation and
\nthe rupiah's recovery.<\/p>\n
The central bank surely will have some say in the timing and
\nsize of bond offers, because almost all of the bonds already
\nissued and those to be issued are owned by state and nationalized
\nbanks and private banks in which the government is the majority
\nowner.<\/p>\n
Provided the central bank can steadily lower interest rates,
\nwhich have now fallen to below 13 percent from as high as 35
\npercent early this year, and barring a new bout of volatility in
\nthe rupiah, the market appears big enough to absorb gradually the
\nRp 350 trillion worth of T-bonds, particularly if foreign capital
\nbegins flowing into the country next year on the back of the
\nnascent economic recovery. A large portion of time deposits at
\ndomestic banks, which totaled more than Rp 410 trillion as of
\nAugust, may shift to bonds if short-term interest rates continue
\nto fall.<\/p>\n
However, raising funds is not the only objective of developing
\nthe bond market, especially in Indonesia, where the capital
\nmarket still lacks depth. Currently, the market only has the
\nshort-term benchmark interest rate -- Bank Indonesia's
\ncertificates of deposit which are only available in one and
\nthree-month terms. It is now nearly impossible to project the
\ncost of money a year from now, let alone set a benchmark to gauge
\nmedium and long-term funds, the main type of financing used for
\ninvestment. The T-bonds will serve as a much-needed benchmark for
\na medium and long-term yield curve.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/reviving-the-bond-market-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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