Fuel price hike to have little effect on bond market

Fuel price hike to have little effect on bond market

Urip Hudiono, The Jakarta Post, Jakarta

With sound monetary policies in place to keep inflation and the
local currency under control, the recent fuel price hike is
unlikely to create major ripples in the local bond market, an
analyst says.

The bond market's yields and prices, Standard Chartered Bank
economist Fauzi Ichsan said, would therefore continue to be
attractive to investors seeking an alternative to putting their
money into low-interest time deposits and the riskier stock
market.

"The reaction of bond yields is likely to be modest," Fauzi
said in the bank's latest economic report on the country's
economy.

"Yields will spike up a bit, but will then come down again."

The bank is predicting that the yield on the 5-year government
bond will continue to decline to 9 percent by the end of the year
from the current 9.5 percent, and 10.1 percent at the end of
2004.

A rise in inflation resulting from the fuel price hike could
create a domino effect as regards prices and yields -- or rate of
return -- of bonds.

If inflation rises and forces the central bank to raise
interest rates, bond yields would eventually have to rise to keep
them attractive.

Indonesian Bond Traders Association chairman Yudhi Ismail is
predicting such a scenario, saying this would result in a greater
burden on the government in redeeming its sovereign bonds, which
would require more taxpayer's money.

Fauzi explained, however, that the government's recent
decision to hike domestic fuel prices would only result in a
modest rise in inflation as it had actually been widely expected.

"The rise in inflation itself will only be temporary --
perhaps for only three months after the hike -- as it is only a
one-time administrative action rather than sustained pressure on
the prices of goods," he said.

Estimating March's year-on-year inflation to rise to 8.5
percent -- as compared to February's year-on-year rate of 7.15
percent as recently reported by the Central Statistics Agency,
Fauzi said that year-on-year inflation would fall back again to
6.8 percent by the end of the year.

Inflation would be kept in check as Bank Indonesia has
consistently maintained its tight monetary policy by absorbing
excess liquidity and avoiding having to raise interest rates, he
added.

"As long as the rupiah can be maintained at a safe level below
Rp 10,000 per dollar -- which is highly likely -- then inflation
will remain in check," he said.

"Last week's weakening of the rupiah was not due to the fuel
price hike, but more to external factors in the form of rising global oil
prices and the tug-of-war between the dollar, the euro and the
Japanese yen," he said, predicting that the rupiah would likely
strengthen to below Rp 9,000 to the dollar by the end of the
year.

The rupiah closed at Rp 9,350 last Friday, down from Rp 9,270
the previous day.

The government plans to hold its third bond issue later this
month on March 29, the finance ministry's Director General of
the State Treasury Mulia Nasution recently said, targeting Rp 2
trillion (some $215 million) in proceeds.

In two earlier bond issues, the government managed to take
in Rp 3 trillion in 12-year fixed-rate bonds last month, and Rp 5
trillion in 10-year bonds in January.

The government also plans to issue $1.5 billion worth of
dollar-denominated international bonds later this year.