Floating bonds overseas

Floating bonds overseas

Buoyed by stronger macroeconomic stability, a steadily
declining debt ratio to gross domestic product and the positive
response from domestic and foreign investors to its rupiah bonds,
the Indonesian government plans to reenter the international
financial market next year.

The 2004 state budget proposal includes a plan to raise Rp
3.48 trillion (US$400 million) from floating international bonds.
For a government bond issue, that amount is quite small. But for
an initial debut, after being absent for so many years from the
international market, such a small bond issuance could well
fulfill the government objective. After all, the deal would be
designed more as a means of testing the water, rather then
raising funds for the budget.

For sure, the credibility of the government in the market has
been strengthening, especially over the past two years, due to
steady, significant progress in its reform measures. Moreover,
the government has steadily cut down its debts from more than 100
percent of GDP in 2000 to as low as 67 percent this year. It is
projected to further decline to a much more sustainable level of
61 percent in 2004 and 52 percent in 2005.

All these achievements have increased market confidence in
both the government's ability to manage the economy and in the
outlook of the economy itself. They also have strengthened the
sense of confidence on the part of the government.

This market confidence can be seen from the inflow of foreign
portfolio investment, the strengthening rupiah, lower inflation
and interest rates. All these positive indicators have in turn
contributed to macroeconomic stability.

True, as critics have claimed and the government itself has
acknowledged, macroeconomic stability would be less meaningful
without high economic growth to absorb the huge amount of
unemployment. The economy will remain fragile if growth remains
below 4 percent, as it has been over the past two years.

Nevertheless, given that Indonesia had virtually been a basket
case among the emerging market countries until as recently as
mid-2001, such progress is indeed impressive, a hard-gained
momentum that should be maintained in order to sustain the
virtuous cycle within the economy.

The government's decision not to renew the International
Monetary Fund (IMF) program and consequently stop new borrowing
from this multilateral agency, at the risk of suffering a net
resource outflow in its official capital account, also reflects
in part its self-confidence.

All this air of optimism and heightened self-confidence does
not, however, mean that the economic road map ahead will all be
as smooth as a freeway. Despite all the progress, selling long-
term debt instruments as bonds in the international financial
market, especially next year when the nation and government will
be preoccupied with three rounds of elections involving no less
than 130 million eligible voters, will not be an easy exercise.

Bank Indonesia Governor Burhanuddin Abdullah said on Tuesday
the government would stage a road show in international financial
centers such as New York and London in September to charm
investors and creditors regarding the market acceptability of
government bonds.

Burhanuddin said the government needed to fully brief the
international market on what the government had thus far achieved
since its disappearance from the market about six years ago.

That is a wise move. But instead of placing too much emphasis
on past achievements, the government team should focus on the
presentation of a credible blueprint of Indonesia's economic
reform agenda for the next three years at least.

Since buying Indonesia's bonds means investing in the future
prospects of its economy, investors or creditors need to be well
informed of how the economy would be managed, not only next year
but also under a new government to be elected next year.

The market also needs to know how the remaining structural
reforms would be implemented in order to remove the barriers that
have so far stood in the way of robust economic growth.

Hopefully, the blueprint of economic reform measures that is
being finalized will meet market expectations. This means that
the new reform mechanism, which will replace the IMF program,
should serve as a reliable anchor on which the market can
reasonably calculate the risks of investing in the Indonesian
government's debt instruments.