Gas bonds won't cure RI debt woes

Gas bonds won't cure RI debt woes

SINGAPORE (Reuters): With the Paris Club deadline looming and relations with the International Monetary Fund still frosty, Indonesia is looking for new ways to raise cash.

But its proposal of a $500 million bond issue backed by gas sales to Singapore has raised eyebrows. Why should a country with debt of over 100 percent of gross domestic product want to raise more, expensive money?

And who will buy Indonesia-linked debt in the wake of the Asia Pulp & Paper debacle and constant political uncertainty?

But the biggest hurdle is the World Bank, which has raised concerns the bond may violate the terms of its loans to Jakarta.

"The deal will only go forward with the World Bank on board," said a source familiar with the matter.

The bonds are to be backed by revenues from a 22-year natural gas sales agreement between Singapore's SembCorp Gas and Indonesia's Pertamina expected to generate between $7-$8 billion in revenues for the government.

Banking sources said the bond was likely to have a five-year maturity, and be structured in a way that ensures the delivery and payment of that gas.

J.P. Morgan Chase, Credit Suisse First Boston, Morgan Stanley, Salomon Smith Barney, and Merrill Lynch are said to be vying for the mandate to finance the deal.

Jakarta was expected to select an underwriter this month. But people familiar with the plan say it could take longer.

Indonesia's chief economics minister Rizal Ramli, who banking sources say is spearheading the plan, has said the funds will be used to ease the country's debt service burden, build infrastructure projects and increase foreign exchange reserves.

The bonds' appeal is that they are backed by dollars from Singapore. Its long-term foreign currency credit rating of AAA against Indonesia's B minus from Standard & Poor's means the bonds would have a better shot at an investment grade rating.

Banking sources told Reuters Indonesia will likely seek an insurance wrap or guarantee to further enchance the rating, and probably place the funds offshore with a trustee bank.

But despite these efforts, analysts warned investors may be unable to shake off their wariness over Indonesian assets.

"I think given the APP (Asia Pulp & Paper) situation, which supposedly had things through Singapore...people are going to look at this and say, 'It's Indonesia. Thanks very much, but it's Indonesia however much you dress it up'," said Alan Greene, credit analyst at Barclays Capital in Singapore.

APP, hobbled with more than $11 billion in debts, is viewed as near default and facing at best massive restructuring.

The facts that it is headquartered in Singapore and its shares are listed on the New York Stock Exchange having proved little protection against a sea of financial troubles for APP, whose controlling ownership and main interests are Indonesian.

An analyst at a foreign bank said while emerging market fund managers were likely to shun the bond issue because of endemic Indonesian political risk, high-risk investors would want a coupon of at least 20 percent, without credit enhancements.

Moreover, a securitised bond issue from Indonesia is not necessarily guaranteed a better rating.

"It's not that easy (for Indonesia to get a better rating) ... even if the Singapore government pays them money in hard currency, with the Indonesia side, how do they protect (those flows)? For example, they might use it for other means," said Takahira Ogawa, director of sovereign ratings for Asia-Pacific at Standard & Poor's.

And given that Indonesia's foreign debt burden is mostly soft loans from multilateral lending agencies, the potential expense of this bond issue raises the question of why Jakarta wants to retire cheap debt at high costs.

"It doesn't make sense to go and raise debt in a fashion like this to retire lower cost debt. So what are they going to do with the money?" said a source familiar with the matter.

IMF

Government officials have also said the funds may be used to refinance domestic debt linked to bailout of the banking sector.

"That's effectively budgetary support, because of the constraints from those interest payments. Even if they use it to help the rupiah, that would ease the pressures on the budget," said a treasurer at a foreign bank in Jakarta.

The government has forecast a 2001 budget deficit of Rp 52.5 trillion, based on an exchange rate of Rp 7,800 per dollar. Foreign financing was projected to plug around 36 percent of the deficit.

However, the IMF's $5 billion programme with Jakarta has been left in the lurch since December due to concerns over Indonesia's commitment to economic reforms.

While Jakarta has repeatedly said differences with the IMF were narrowing, the Fund has been silent on the matter.

Besides the negative impact it has on sentiment towards Indonesia, the impasse with the IMF could disrupt lending from other parties. Japan has already said Indonesia's backsliding on reforms required by the IMF could hamper future Japanese lending.

More crucial is the deadline at the end of this month for the second half of Indonesia's Paris Club agreement to reschedule $5.6 billion worth of debt. Technically, the IMF needs to approve govenment reform efforts for the agreement to kick in.

"It could be the case that the government is expecting the IMF to walk... you can see why the government is looking into private sector financing," said the foreign bank analyst.

World Bank

But Indonesia is flirting with an idea that may estrange another major lender, the World Bank.

According to banking sources, the Bank's main concern is whether the bond issue violates the negative pledge clause, which applies to all its loans.

Basically, the clause stipulates Indonesia cannot pledge its national assets to other creditors, in order to ensure World Bank debt ranks senior.

Another World Bank worry is whether Indonesia has exhausted all possible means of concessional funding, banking sources say.

Analysts said the international lenders may also be concerned Jakarta could dig itself deeper into debt, rather than pay off its current loans.

"It's like taking food away from your kid's mouth," said a foreign economist.