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.