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.