Government, House agree on reduction of outstanding bonds

JAKARTA (JP): The government and the House of Representatives agreed on Tuesday to reduce the amount of the government bank recapitalization bonds by Rp 10 trillion (US$1.07 billion) next year to ease the burden on the 2001 state budget.

The director general of the state budget, Anshari Ritonga, said the reduction would be made by allowing recapitalized banks to exchange part of their bonds with performing bank loans held by the Indonesian Bank Restructuring Agency (IBRA).

"The reduction (of the outstanding bonds) will ease the burden on the state budget," he said on the sidelines of a closed-door meeting of the joint government-legislature budget committee.

The government has issued around Rp 650 trillion worth of bonds to finance the bank recapitalization and bailout program.

The state budget covers the interest rate of the bonds, and for the 2001 budget year this cost has been forecast at more than Rp 55 trillion, which would make it the largest contributor to the estimated budget deficit of some 3.7 percent of gross domestic product.

Legislators have pressured the government to reduce the outstanding bonds to lower the burden on the state budget. The House initially demanded a reduction of around Rp 20 trillion in the cost borne by the budget.

Legislator Aberson Marle Sihaloho, a member of the House budget committee, said IBRA initially demanded its cash target for next year be reduced to Rp 18.9 trillion before it would agree to the deal.

But Aberson said the government needed IBRA to raise Rp 27 trillion in cash next year to help finance the budget deficit.

He said that by retiring Rp 10 trillion of the bonds plus the recent agreement with Bank Indonesia to take over Rp 24.5 trillion of the government bonds, the interest cost for next year's budget would decline to around Rp 53.5 trillion.

IBRA is expected to raise Rp 27 trillion next year through the sale of various bank assets under its control. The agency is on track to meet this year's revenue target of Rp 18.9 trillion.

The agency manages around Rp 260 trillion in nonperforming loans transferred from recapitalized and closed banks. Some of these loans have been restructured by the agency.

Instead of injecting cash into ailing banks, the government recapitalized domestic banks by injecting bonds. Several recapitalized banks earlier expressed interest in exchanging part of their bonds with the restructured loans under IBRA's control to allow them to resume lending.

But experts have said there was a risk the capital adequacy ratio (CAR) of the recapitalized banks would deteriorate if the risk-free government bonds were exchanged with the IBRA loans, particularly given the continued uncertainty in the overall economy.

In other matters, Anshari said the budget committee also agreed to lower the government fuel subsidy for next year to Rp 31.5 trillion from Rp 36.4 trillion.

The government raised fuel prices by an average of 12 percent in October to reduce the fuel subsidy in the 2000 state budget.

The government must reduce the subsidy as part of the overall economic reform program agreed to with the International Monetary Fund, but the reduction must be made gradually because fuel is a politically sensitive commodity in the country.

The government and the House also agreed on Monday to revise some economic assumptions in the 2001 state budget.

The exchange rate assumption has been revised to Rp 7,800 per US dollar from Rp 7,300. The price of oil also was revised to US$24 per barrel from $22.

The director general of taxation, Machmud Sidik, said the change of the exchange rate assumption would increase the tax revenue target for next year to Rp 179.89 trillion from the initial target of Rp 173 trillion. (rei)