Bonds issue delay may stall IMF deal

JAKARTA (JP): A delay in the government's plans to issue about Rp 30 trillion (US$3.19 billion) worth of bonds for its blanket guarantee scheme on banks, may jeopardize the signing of the next letter of intent (LoI) with the International Monetary Fund (IMF).

Chief of the Ministry of Finance's debt management unit Fuad Rahmany said on Wednesday that details of the bond issue had yet to be drawn up despite the approaching deadline for the signing of the LoI.

"We must be frank with the IMF and explain our situation. It's bad timing," Fuad said at his office.

He said the bond issue was among the six prerequisites the government must fulfill before the IMF agreed on a new LoI.

The amount of bonds to be issued and their coupon rates must be discussed with the House of Representatives (DPR), which is in recess until Aug. 16, he said.

As Independence Day is on Aug. 17, followed by the weekend, consultation with the legislators is unlikely before Aug. 20.

The IMF expects to sign a new LoI, which basically sets out the country's economic reform targets, by late August or early September at the latest.

The newly installed Cabinet will only have about two weeks to prepare before the LoI deadline.

The economics ministers must address reform targets, which have been put on halt since the absence of a working Cabinet.

Missing the deadline puts at risk Indonesia's debt restructuring talks with sovereign creditors under the Paris Club.

The IMF wants the government to replenish its funds for its blanket guarantee on banks by issuing new bonds, Fuad added.

"They (IMF) fear our weak banking sector is still vulnerable to a run, which the government must cover," he said.

In January 1998, the government set up a blanket guarantee scheme covering banks' third party funds, including interbank claims.

The measure was taken to instill public confidence in the banking sector, after the 1997 closure of 16 private banks led to massive runs in other banks.

To this end, the government issued Rp 53.77 trillion in bonds, which Bank Indonesia had assumed in exchange for paying out the guarantee funds.

Fuad said fears that some banks might face closure if they failed to meet the minimum capital requirements by year end, required the issuance of new bonds.

According to Fuad, earlier estimation puts the shortfall at Rp 30 trillion.

"But we may have to revise that figure as our banking sector is improving. The current amount may even be enough," he said.

Fuad said chances of bank closures had dimmed since the IMF made its assessment on the blanket guarantee funds.

He explained that the bonds were solely for Bank Indonesia and were thus not tradable.

Fuad added that the bonds carried coupon rates of only 3 percent. But payments of the principles were tied with inflation rates, he added.

The government has also issued bonds for Bank Indonesia to cover payments of its emergency liquidity funds.

In total, he said, the central bank received some Rp 218.3 trillion in government bonds. (bkm)