'Bond market retarded by varous factors'

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono stated yesterday that the lack of liquidity and a benchmark, and the absence of a central clearing and custody body are still impeding the progress of the bond market in Indonesia.

"There are also other problems hindering the bond market's development. But we're making serious efforts to boost the development," Soedradjad told the 27th world congress of the International Association of Financial Executives Institutes (IAFEI).

Speaking to reporters after addressing the congress, he said that the lack of liquidity is due to the absence of a well- developed secondary bond market in the country.

"People here buy bonds to keep for a relatively long time," he said.

As a result, the bond buyers are only active in the primary market, meaning that they only buy the papers for interest gains. If a secondary market develops well, bond buyers can actually expect capital gains and that in turn makes the market more liquid.

Soedradjad pointed out that a number of analysts have suggested that the government should issue a benchmark bond domestically.

"Of course we need a benchmark but the government cannot do it because of our commitment since 1967 to maintaining a balanced budget," he said, adding that a balanced budget always requires the government's revenue to equal its spending.

He said that issuing bonds domestically means that the government borrows money at home -- a step that violates the system of the balanced budget.

The government, he said, can only seek loans abroad.

"I think if we look at other countries, this kind of financial source makes them undisciplined in running their state budgets. Every time their revenue cannot meet their spending, they just issue bonds domestically," he said, suggesting that their spending, therefore, tends to continually increase.

But he said that in the near future, the government will choose one bond issued by private or state-owned companies to stand as a benchmark domestically.

"There have been 50 private and state-owned companies that have already issued bonds domestically. I think we shall choose one bond that will become the benchmark for the issuance of other bonds," he noted.

He said that recently many countries have issued sovereign bonds in key major financial markets, such as the United States, Europe, Japan and other Asian countries. Similarly, private corporations have also made use of their vast financial resources to place their debt securities in those markets.

"In the Indonesian case, many large corporations have penetrated offshore bond markets which paid very high interest. However, with improved knowledge of the market as well as experience gained from the recent issuance of bonds, Indonesian companies could manage to have better yields," he said.

Soedradjad, who talked about "Infrastructure Funding: Major Development in Asia" during the congress, noted that the issuance of bonds is one of many financial sources that could be tapped to fund the development of the infrastructure needed to spur economic growth.

"A large financial commitment is required for the development of infrastructures," he said.

The World Bank, he said, reported that the value of the infrastructure needed in East Asia exceeds US$1.5 trillion between the year 1995 and 2004. Of this, Indonesia alone needs about $190 billion.

"For a country that has access to extensive financial sources, this commitment can be met easily. However, for other countries, infrastructure funding requires greater effort," he said. (bnt)