Government to proceed with asset-backed bond issue plan

Government to proceed with asset-backed bond issue plan

JAKARTA (JP): Director general of financial institutions
Darmin Nasution said on Wednesday that the government would
proceed with its plan to issue bonds backed by the sale of
natural gas to Singapore.

But Darmin said that the government would discuss the plan
with the World Bank to ensure that it would not contravene the
terms of the Bank's loan agreement.

"We'll proceed (with the bond plan). But we'll also continue
to talk with the World Bank," he told reporters on the sidelines
of a hearing between the finance ministry and the House of
Representatives Commission IX on budgetary and financial affairs.

"We're in the process of selecting financial consultants," he
added.

Darmin declined to comment further, saying that the plan was
the responsibility of the Coordinating Minister for the Economy
Rizal Ramli.

Rizal has said that the government was planning to issue up to
US$1 billion worth of bonds backed by the abundant natural gas
reserves off West Natuna Island.

But there has been concern that the plan could contravene the
negative pledge term set by the World Bank. According to this
term, Indonesia cannot freely pledge its national assets,
including export revenues, to other creditors. This is in order
to ensure that the World Bank loans have preference.

There are also other concerns over the plan.

An informed source said that the cost of the bond issue could
be high because the country's investment rating was still low
amid the current political turbulence at home, in addition to the
already huge government debt burden.

The source also said that the plan would require the
government to keep the export revenues from the gas sales in a
joint escrow account with the bank acting as the lead manager of
the bond issue.

"Thus, the government will not have flexibility in using the
(export revenue) fund, including a case where export revenues are
higher than expected," the source said.

The source suggested that the government delay the asset-
backed bond issue plan.

Rizal has said that the plan to securitize exports of natural
gas was one way to help refinance the large government domestic
debt incurred for the purpose of financing the country's massive
bank restructuring and recapitalization program.

The government has issued around Rp 430 trillion (US$45
billion) worth of bonds to finance the bank recapitalization
program. A large part of the bonds is scheduled to mature in
2003, at a time when the government must also repay its massive
foreign debt.

The government has signed an agreement to sell natural gas
from West Natuna to Singapore. The gas sale contract is expected
to generate between $6 billion and $7 billion in revenue for the
government over the 22 years of the contract. The first gas
delivery via an submarine pipeline was made on Jan.3. (rei)