RI begins to rely on the market for its funding needs<\/p>\n
Kahlil Rowter, Head of Research, Mandiri Sekuritas, Jakarta<\/p>\n
Next year, for the first time in the last four decades, the
\nGovernment of Indonesia will rely on bond issuance to finance its
\nbudget deficit. To a lesser extent the same will also take place
\nthis year. Despite its probable mild impact, the GOI need to put
\nin place several mechanisms to ensure this exercise is
\nsuccessful.<\/p>\n
In its revised 2003 budget, the government was being realistic
\nin accepting that the deficit will probably be larger than
\nexpected. The deficit is expected to be 2 percent instead of 1.8
\npercent earlier expected. To a large extent the main reason will
\nbe the lower nominal GDP growth, due to a significantly lower
\ninflation (down to 6 percent from 9 percent) while real GDP
\ngrowth will probably remain at 4 percent as expected. The nominal
\ndeficit itself will increase about Rp 660 billion.<\/p>\n
Nevertheless it is worth noting that one item in expenditure
\nthat will increase significantly is fuel subsidy. The addition of
\nabout Rp 13 trillion results from the increase in international
\noil prices. The bulk of subsidy is borne by the central
\ngovernment while the additional revenues must be shared with
\nregional governments. Therefore the central government bears the
\nbrunt of international oil prices above the budget assumption.<\/p>\n
More significant changes are taking place in the financing
\npart of the budget. The lower international aid disbursement plus
\nshortfall in privatization proceeds mean that domestic bank
\nfinancing, mainly in the form of government debt operations will
\nhave to take up the balance.<\/p>\n
In total domestic financing will increase by Rp 9.4 trillion,
\nthe bulk of which comes from debt operations. Bond issuance will
\nbe increased by Rp 4 trillion to Rp 11.7 trillion while the bond
\nbuyback program has been scaled back by about Rp 4.2 trillion to
\nRp 9.4 trillion. In total, therefore, government debt operation
\nwill contribute about Rp 8.2 trillion or 87 percent of the
\nincrease in domestic financing.<\/p>\n
Next year, the amount of buyback will also be reduced to only
\nRp 5.6 trillion. This plus the maturing government bonds
\namounting to Rp 18.9 trillion will mean that the government has
\nto prepare at least Rp 24.5 trillion for debt operations. This is
\nwhy bond issuance is set at Rp 28 trillion, leaving the net
\naddition from domestic debt operations at Rp 3.5 trillion. Add to
\nthis the planned international bond issuance of Rp 3.5 trillion
\nto come with total net increase in government debt of Rp 7
\ntrillion.<\/p>\n
Although the net amount of increase in debt appears small, it
\nshould be noted that this represents a shift in debt strategy.
\nWhereas until this year the level of debt has actually decreased
\ndue to smaller issuances compared to maturing amounts, in the
\nfuture this amount will either increase or at the most
\nmaintained. Another change is the way in which debt level changes
\nare financed. Until now cash from outside debt operations has
\nbeen used to pay down the debt level.<\/p>\n
But starting next year, due to pressure on revenues, maturing
\nbonds will be financed by new issuances. The debt operations unit
\nwill, therefore, have to manage its cash flow internally. And,
\ndespite its size, the net addition of Rp 3.5 trillion means that
\nfor the first time debt operation will actually contribute to
\nbudget revenue.<\/p>\n
In the future foreign financing might still be constrained by
\nseveral factors, not the least of which is our own absorption
\ncapacity. And should economic growth not pickup significantly,
\ntax revenues may not be able to sustain non-debt expenditure
\nrequirements, let alone providing enough amounts to re-pay
\nmaturing government bonds. Hence, the reliance on the market as a
\nsource of re-financing for maturing bonds, naturally increases.<\/p>\n
The government has probably realized this early on and has
\nprepared the primary as well as the secondary market well.
\nEnactment of the government bond and state finance laws certainly
\nadds to government debt credit strength. And the creation of the
\nassociation of bond dealer (HIMDASUN) along with its trading
\nplatform have helped increase trading liquidity and price
\nefficiency as well as transparency. These measures go a long way
\nin enhancing the secondary market, which also positively impacts
\nthe primary market, mainly because the HIMDASUN is effectively a
\nprimary dealership group, although not called so.<\/p>\n
This is made possible through having a liquid secondary market
\namong players with similar risks and building a relationship
\namong the group with Bank Indonesia as well as the Ministry of
\nFinance. Not less important is the network built between HIMDASUN
\nmembers and other players in the market. Although not yet acting
\nas underwriters HIMDASUN will help ensure that any bond issuance
\nwill be successful, as long as it appeals to the market.<\/p>\n
With a higher reliance on the market for its finance the
\ngovernment needs to put more consideration on the market appetite
\nand put proper balance on this factor along with other
\nrequirements such as the goal of reducing re-financing risk. One
\nway to do this would be to aim the buyback operations at those
\nbond series that are less liquid and not just focusing on series
\nthat fall in certain maturity ranges.<\/p>\n
Another would be to consider issuing shorter maturity series
\nand in the longer term filling in the yield curve with benchmark
\nissues. Having a more regularly scheduled auction for both the
\nbuyback as well as new issuance will also add to market
\ncertainty. It should be noted that having a more frequent auction
\ndoes not necessarily tie the government's hands in issuing or
\nbuying back at pre-specified amounts. Therefore, this balances
\ndegree of freedom with a more certain and regular market. It will
\nalso impose discipline on the market as well as the government
\nitself, both of which increase efficiency.<\/p>\n
Like or not, without much fanfare, the government is starting
\nto rely on the market for its funding needs. In the longer term
\nthis should be codified into a broader program of funding through
\nthe market and relying less on bilateral as well as multilateral
\nsupport. This shift entails a major requirement for revamping the
\ngovernment's own debt as well as cash management systems and
\noperations. And most importantly, relying on the market means
\ncatering to what the market wants.<\/p>\n
This article is written in personal capacity<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/ri-begins-to-rely-on-the-market-for-its-funding-needs-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }