Deutsche Bank optimistic about government bonds issue

Dadan Wijaksana, The Jakarta Post, Jakarta

As the government began on Monday a road show for its plans to issue some Rp 2 trillion (US$224.72 million) worth of bonds later this week, Deutsche Securities Indonesia -- one of the three firms appointed as arrangers for the issue -- expressed optimism that the market would fully absorb the bonds.

Suresh L. Narang, chief country officer of Deutsche Bank, revealed on Monday at least two reasons for this optimism.

"One is that the (bond's) rating is of the highest level, since it was issued by the government. Second, there is good liquidity in the system. So, we're confident that the bonds will be absorbed by the market," he told The Post.

With the government as the issuer, the bonds, which carry a eight-year maturity period, will have little risk of defaulting, thereby increasing investor' interest.

In addition demand from companies for such bonds has been rising in the country.

"Pension funds and insurance companies in particular are looking for assets with longer maturity profiles to balance their liabilities, so this is a good opportunity for them," Narang said.

The government has said that the proceeds of the bonds will be used to help cover the expenses it spent in July to redeem maturing bonds of the same amount at that time.

The issuance of the bonds, the proceeds of which the government expects to amount to between 14.5 percent and 15 percent upon maturity, serves as a way for the government to manage its huge domestic debts.

It forms part of the refinancing program developed by the government to spread out the massive debt payments so they are more affordable.

The government had issued around Rp 660 trillion worth of bonds to local banks and Bank Indonesia as a result of what was probably the world's costliest banking bailout ever during the 1997 economic crisis.

Local banks received some Rp 430 trillion in recapitalization bonds on which the government has to pay some Rp 59 trillion in interest this year.

Bank Indonesia got another Rp 144 trillion in bonds to replace funds it had spent on local banks hit by massive runs during the crisis.

With a large chunk of these state bonds starting to mature in 2004 -- with the highest payment worth some Rp 81 trillion due by 2009 -- the government has no choice but to replace maturing bonds with new ones carrying longer maturity profiles.

For next year, the government also plans to issue new bonds to refinance some Rp 7.47 trillion worth of recapitalization bonds and those owed to the central bank due to mature during the year.

In another public debt management scheme, the government has also gained approval from the House of Representatives to delay the payment of Rp 174.59 trillion worth of recapitalization bonds to four state banks, under a reprofiling scheme.

The scheme allows the government to push back until 2020 the payment of recapitalization bonds which should have matured between 2004 to 2010.