Wed, 28 Jul 2004

Bond issue draws healthy response from investors

Dadan Wijaksana, Jakarta

The government sold Rp 3.5 trillion (some US$385 million) worth of bonds on Tuesday, almost twice the size of the initially planned issue due to a robust response from investors.

The government initially planned to sell Rp 2 trillion worth of bonds, but decided to increase the size of the offer after receiving Rp 6.3 trillion in bids, mostly from local investors, the Ministry of Finance's director general for financial institutions, Darmin Nasution, said.

Standard Chartered Bank's economist Fauzi Ichsan told The Jakarta Post the healthy response reflected increased investor confidence in the economy despite several shocks, ranging from the elections to a recent small explosion.

"It is a vote of confidence. Also, as the bonds were mostly bought by local investors, it confirms the trend that investors are willing to shift from conservative investment instruments such as the SBI (the central bank's promissory notes) and bank deposits to longer-term investment like bonds," Fauzi said, adding that the trend has been led by mutual funds and pension funds.

Fauzi dismissed worries that the trend could impact liquidity in the banking sector and in turn hurt the real economy, which are very much dependent on credits from banks for growth.

He insisted that there was still a huge excess of liquidity in the banking sector.

"Even if all the funds stayed in the banks, they would not be distributed to the real sector at least until after next year," he said.

Indonesia's economy has grown by 3 percent to 4 percent over the past three years, thanks mostly to robust domestic consumption.

The country's real sector remained weak thanks in part to banks' reluctance to provide financing. This has resulted in the current excess of liquidity in the banking sector, which estimates put at between Rp 120 trillion and Rp 150 trillion.

Darmin said the bonds on Tuesday were sold at a weighted average yield of 11.59 percent and will mature on Dec. 15, 2012.

The government had planned to sell bonds every month this year to help finance the state budget deficit, which is estimated at Rp 24.4 trillion, or about 1.2 percent of gross domestic product.

However, in May the government dropped the planned sale of Rp 3.5 trillion worth of 15-year bonds because investors demanded an overly high yield.

It also called off a bond sale in June amid volatility in the financial market sparked by the U.S. Federal Reserves' plan to raise interest rates, rising oil prices and political uncertainty at home ahead of the presidential election. The Fed's plan to raise interest rates drove investors to switch to dollar-based assets.

Tuesday's issue brings the total value of domestic bonds issued this year to Rp 11 trillion. The government plans to issue Rp 32.5 trillion worth of bonds over the course of the year, including $1 billion worth of sovereign bonds.

The rupiah on Tuesday gained from the issue, ending stronger at 9,070 per dollar as compared to Monday's closing of 9,145.

Bond Issue as of July 27 --------------------------------------------- Batches Bond size Bids received --------------------------------------------- 1st. Feb. 24 Rp 2.53t Rp 5.3t 2nd. March. 16 Rp 2.00t Rp 5.7t 3rd. April 27 Rp 3.00t Rp 9.9t 4th. July 27 Rp 3.50t Rp 6.3t --------------------------------------------- Source: The Jakarta Post's files