Wed, 21 Jan 2004

Global bond to increase burden on state budget

The Jakarta post, Jakarta

State Minister for National Development Planning Kwik Kian Gie criticized on Tuesday the government's plan to issue a global bond this year as it ran contrary to the government's own pledge to gradually reduce the country's debt stock.

The bond issue, expected to be worth US$400 million, would only put more pressure on the state budget, which is already heavily burdened by the government's obligation to service its existing huge debt (both foreign and domestic).

"They (government) said it will reduce our foreign debt. So why issue an international bond? It only means more debt," said Kwik, who despite the collective nature of the Cabinet has never been shy in attacking the policies of his fellow ministers.

Kwik said that his stance did not mean he was against foreign debt, but he was concerned about the effectiveness of the way in which the debt had been used and how it benefited the economy. "Foreign debt can be defined as effective if it is used to finance projects that can produce income that can be used to repay it."

Even without the new burden, servicing the country's existing debt has placed massive strains on the state budget. For 2004, the state budget will have to fork out around Rp 24.4 trillion to pay the interest on foreign debt alone, while Rp 44.4 trillion is required to repay maturing foreign loans.

In total, this is greater than the Rp 68.1 trillion allocated for development spending, and far in excess of the Rp 12 trillion allocated this year to finance poverty-alleviation programs.

If this trend continues, Kwik said: "It's obvious that we will have to seek more loans, and will keep go on going like this in the years to come unless there is a strong will to significantly reduce our national debt."

As of the second semester of last year, Indonesia's foreign debt stood at some US$76 billion.

Despite Kwik's objection, however, it is highly unlikely the government will scrap the plan.

On Tuesday, the Ministry of Finance appointed Deutsche Bank and JP Morgan as the lead underwriters for the bond issue, the first since 1996.

The issue is scheduled for early March, after a government team completes its overseas road show to excite global investor interest.

The lead underwriters were selected from six investment banks proposed for the job. Citigroup, Credit Suisse First Boston, Morgan Stanley and UBS were the other four.

Director General of Financial Institutions Darmin Nasution told a press conference that the government had also appointed U.K.-based Cleary, Gottlieb, Steen & Hamilton as the legal advisers for the issue.

The government is planning to issue the bond as an alternative source of funding to help finance the 2004 state budget deficit, which it is estimated will come in at 1.2 percent of the country's gross domestic product (GDP).

Investment banks have been predicting that the issue will be a success, given the improvements that have taken place in the country's economy.

Besides the global bond, the government also plans to issue about Rp 28.5 trillion worth of domestic bonds this year.

A global corporate bond was launched earlier this month by Excelcomindo Pratama, the country's third largest cell phone operator, which yielded $350 million in proceeds.