Government finalizing steps to launch treasury bonds

JAKARTA (JP): The government is close to finalizing preparations for the launch of short-term treasury bonds that will be used to finance future budget deficits and crucial for the avoidance of a potential fiscal disaster in 2004, when many bonds already issued by the government mature.

Ministry of Finance Director General for Financial Institutions Darmin Nasution said that a draft law on bonds would soon be proposed to the House of Representatives.

"It (the bill) is still being checked for the last time by the ministry's legal office before being sent to the President, following which it will be proposed to the House," Darmin said last week.

"If the bill is approved by the House then we can issue the treasury bonds," he added.

The government initially planned to start issuing the six- month to 12-month bonds in April, but a host of economic and political problems confronting the government are believed to have been responsible for stalling the plan.

"It turned out that drafting the law on bonds took longer than we had expected," Darmin said, pointing out that various government-related agencies and Bank Indonesia had been involved in drafting the law.

Darmin said that the law would provide the legal basis for the government to issue the bonds.

He added that, according to the draft law, the bond issue was aimed at helping to finance future budget deficits and to redeem part of the massive government bank recapitalization bonds previously issued, to avoid fiscal catastrophe.

Economists have said that, as a result of the country's severe economic crisis that started in 1997 and the costly bailout of domestic banks by the government, the state budget would continue to be haunted by painful deficit problems over the next decade.

The government has issued bonds worth around Rp 650 trillion, which is equal to nearly half the nation's gross domestic product (GDP), to finance the restructuring and recapitalization of domestic banks. This is the largest amount ever spent by any country in the world to bailout its banks.

A majority of the outstanding bonds will mature in 2004, with a total value of Rp 170 trillion. In 2008, bonds worth some Rp 150 trillion will also mature, causing an unbearable burden on the state budget.

Economists have warned that the government must be able to redeem part of the outstanding bonds within the next two years to avoid risking another economic crisis, particularly as international donors could no longer be expected for assistance, both in terms of new loans or debt restructuring facilities, amid the prospect of an economic slow down in developed countries.

"We'll redeem part of the bonds by issuing the treasury notes," Darmin said.

But Darmin was quick to say that the treasury bonds would not be used to finance the 2001 budget deficit.

"Even if the House approves the draft law soon and we can launch the bonds this year, we are not committed to financing the current deficit," he said.

The 2001 budget deficit could widen to the dangerous level of 6 percent of GDP, compared to initial projections of 3.7 percent of GDP, mainly due to the continuing exchange rate fall of the rupiah against the U.S. dollar and rising domestic interest rates. The government is planning to propose some measures the House this week under a fiscal adjustment package in an attempt to maintain the deficit at the 3.7 percent of GDP.

Darmin also said that, during the initial discussions, there were suggestions from Bank Indonesia and the International Monetary Fund (IMF) that the treasury bonds also be used immediately to replace the central bank's one-month and three- month SBI promissory notes as a monetary instrument.

"But we told them we can't do that because the cost would be very huge," he said, without elaborating.

To absorb excess liquidity in the economy and help curb inflationary pressure, Bank Indonesia has been issuing SBI notes. However, the central bank has to pay the interest on SBIs, which has continued to rise because of the weakening rupiah.

Experts have also said that the treasury bonds would provide a benchmark for the lifeless domestic bond market.

"A risk-free reference is needed to provide bond investors with a realistic and computable assessment of risk," said one fixed-income analyst.

"If risk cannot be quantified, investors may avoid the market altogether," the analyst added.

Darmin declined to disclose the structure of the planned bond issue, only explaining that the issue would be managed by the finance ministry's debt management office.(rei)