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)