Government launches first bond issue of the year

Dadan Wijaksana, The Jakarta Post, Jakarta

The government has issued eight-year bonds worth Rp 2.52 trillion (about US$295 million) on Tuesday, the first batch of bond issues planned for this year to help finance the ailing state budget.

Ministry of Finance debt management division head Fuad Rachmany said the bond carried a weighted average yield of 11.82 percent and was 2.14 times oversubscribed.

"Thanks to a steady decline in domestic (interest) rates, the yield was lower than the one we set for the last bond issue," Fuad said, referring to the Rp 3.2 trillion of bonds auctioned in December last year.

At that time, the average yield stood at 13.05 percent.

The central bank, which conducted the auction, received bids from banks and pension funds for yields from 11.65 percent to 12.7 percent for the bonds, which will mature on Dec. 15, 2012.

Over the past two years the government has issued bonds to raise new funds to pay the state budget deficit. Its ability to finance the deficit has been hampered by a huge debt burden -- the fallout from the collapse of the banking sector in 1998.

The government plans this year to issue Rp 28.5 trillion in domestic bonds in addition to at least $400 million worth of global bonds. The government issued Rp 11.7 trillion in domestic bonds last year.

Fuad said provided the current declining trend in interest rates continued, the next bond issues would carry a lower average yield.

The government has issued new bonds to refinance maturing ones.

During and after the late 1990s banking crisis, the government issued more than Rp 600 trillion worth of bonds to bailout troubled banks.

Taxpayers have had to cover most of this huge debt as the Indonesian Bank Restructuring Agency (IBRA), which took over assets from the banking sector, has managed to only recoup around one third of their value.

A large chunk of the debts have started to mature, which for this year alone, there are around Rp 25 trillion. In addition, the state has allocated Rp 41.3 trillion from its budget to service the domestic bonds.

If combined, these figures represent 86 percent of this year's state budget allocation for spending on development.

Tuesday's bonds issue was meant to help finance these maturing bonds.

Critics have said such a scheme, which extends the maturity profile of those bonds, does not resolve chronic debt problems but only shifts them to the next generations.