Government committed to redeem maturing bonds

The Jakarta Post, Jakarta

The government has set aside around Rp 3.9 trillion (US$410 million) to cover the redemption of bonds of equal value maturing in July, state budget director general Anshari Ritonga said on Wednesday.

"No, there won't be a rollover, the government will fulfill all its obligations," he told reporters on the sidelines of a seminar on the economy.

He said that the money would come from excess funds from the previous state budget.

The government issued more than Rp 430 trillion worth of bonds in the late 1990s to recapitalize ailing banks. The first tranche of the bonds to mature is worth Rp 3.9 trillion, which reports said are partly held by Bank Central Asia (BCA).

Anshari's statement should ease concern that the government might fail to redeem the bonds.

The cash-strapped government initially planned to issue short- term bonds with maturity periods of between 6 months and 12 months called treasury bills, or T-bills, to replace the maturing bonds. But before issuing the T-bills, the House of Representatives must first approve the proposed sovereign debt securities law, which will serve as the legal basis for the issuance of the bonds.

The House, however, is in recess until May 12. Legislators have indicated that the drafting of the proposed law will not be completed before July.

Issuing the T-bills is crucial to avoiding a fiscal disaster especially when a large chunk of the bonds mature in 2004 and 2009.

This year, a total Rp 18 trillion worth of bonds will mature. The amount maturing this year will increase to Rp 25 trillion. The figure will get bigger and bigger in years to come, reaching its peak in 2009 when the government will have to cover the redemption of around Rp 100 trillion in maturing bonds.

Managing and restructuring this huge public debt has been one of the most difficult problems faced by the government.

A large chunk of the state budget has to be allocated to servicing these debts, thus cutting down on the funds available for development. This year alone, some Rp 59 trillion has been allocated to cover the interest on bonds.

The Indonesian Bank Restructuring Agency (IBRA) is under pressure to help the government redeem part of the bonds to ease pressure on the state budget.

The agency initially plans to swap some of the bonds with restructured bank loans under its management. IBRA has targeted the exchanging of around Rp 7.5 trillion worth of bonds with the restructured loans.

However, the results so far have been zero. Banks have been reluctant to exchange the bonds, which have been the largest contributor to the profits of most recapitalized banks, mainly because of the high risk associated with the loans and the requirement to set aside large provisions which in turn could threaten the banks' capital adequacy ratios (CAR).

The central bank, which still oversees the banking sector, also insists that IBRA guarantee the loans to be transferred to the banking sector in case they turn sour.