Analysts question market capacity to absorb govt bonds

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)