Analysts question market capacity to absorb govt bonds

JAKARTA (JP): Analysts have cautiously welcomed the planned secondary offering of the government's multibillion-dollar bond issuance, questioning the capacity of the domestic market to absorb the huge size of the bonds.

"The sentiment is there because the interest rate is declining. But what I'm very concerned about is the capacity of the market to absorb the bonds," said Fonny Yulika from the fixed income division of PT Vickers Ballas Tamara.

She said the current turnover of the domestic bond market was in the "tens of trillion of rupiah", compared to more than Rp 200 trillion (US$28 billion) worth of treasury bonds to be tradable in stages starting February.

The central bank has said trading of the government-issued bonds by state and private banks would be conducted gradually in order not to disrupt the local bond market.

"But even if the size of the first stage is Rp 30 trillion, it is still too large," Fonny said.

She said investors would be interested in subscribing to the bonds, but they would not unload all their existing investment in buying the government's bonds.

Head of fixed income at PT Sigma Batara Alferno Soenardji concurred.

He said the huge size of the bond issuance raised concerns about its market liquidity.

"I can't predict the market liquidity (of the bonds) yet. But if the supply is bigger than demand, it will have poor liquidity," he said.

"With such a huge bonds' supply, it's difficult to have the market liquidity as expected by public investors."

The government issued more than Rp 200 trillion worth of bonds this year to finance the recapitalization program of both state and private banks.

The bonds were injected into the banks to boost their capital adequacy ratio to the mandatory 4 percent minimum. The banks obtain cash from the coupon rate of the bonds.

Bank Indonesia is preparing the infrastructure of the secondary bond market to allow trade in the bonds.

Bank Indonesia deputy governor Miranda Goeltom said on Thursday that all preparation for trading of the bonds was expected to be completed in January, after the threat of the Y2K bug passed.

She said she could not state the size of the bonds to be offered during the first stage because discussions and preparations were continuing.

"What's important is stability of the social and political condition to make the bonds attractive," she said on the sidelines of a seminar.

Miranda said recently the government bonds would be offered at a coupon rate of between 12 percent and 14 percent.

She expected the central bank benchmark interest rate to fall to between 10 percent and 11 percent to ensure the bonds were attractive.

The interest rate of Bank Indonesia's one-month promissory notes is currently 13 percent.

The bonds have a maturity of between three years and 20 years.

Alferno said the bonds should ideally have a coupon rate of 1 percent to 2 percent higher than bank time deposit rates, currently a little higher than 13 percent, to make them attractive.

"But the problem once again is market liquidity," he said.

He said that domestic banks, which during the precrisis period were major bonds investors, could no longer be expected to participate as only a few of the banks currently had enough cash.

He said the remaining market potential consisted of companies with strong cash flow.

Fonny said a large oversupply of bonds in the market would lead to agents asking for a sizable discount, which in turn would push down the price of the bonds.

She said that one way to improve the capacity to absorb the bonds was by inviting foreign investors to participate.

However, she acknowledged that foreign investors continued to view the country as a risky investment. (rei)