Govt cancels Rp 3.5t bond issue
Govt cancels Rp 3.5t bond issue
Rendi A. Witular, Jakarta
The government failed on Tuesday to issue bonds seen as
crucial to help finance the current state budget amid rising
economic uncertainty as a result of the falling rupiah.
The Ministry of Finance was scheduled to issue Rp 3.5 trillion
(US$388.46 million) worth of bonds, but it decided to cancel the
issue because investors demanded overly high yields.
"We have canceled the issue because investors demanded yields
that are above our limits," said Minister of Finance Boediono in
a press conference on Tuesday.
The government received bids totaling only Rp 3.1 trillion for
the seven-year bonds during the open auction conducted by Bank
Indonesia, with bidders asking for an average yield of 11.74
percent, higher than 10.72 percent yield at last month's bond
auction.
The government plans to issue a total of Rp 28.5 trillion
worth of rupiah-based bonds to help finance the state budget. It
has so far issued around Rp 7.5 trillion bonds in three batches.
The past bond issues had been relatively successful as demand was
strong amid a favorable macroeconomic outlook, allowing the
government to offer lower yields.
Commenting on the demand for higher yields during the Tuesday
bond auction, HSBC director for the debt market, Radianto Kusumo
said that investors were now in a state of uncertainty following
the sudden depreciation of the rupiah against the U.S. dollar,
the threat of inflation and higher interest rates.
"Investors are nervous and cautious because of the decline in
the rupiah, which may force the central bank to increase its
benchmark interest rate to help curb inflation. The market is
still volatile," said Radianto.
Domestic real interest rate is currently around 2 percent,
which is relatively lower than the rates in other countries.
This low interest rate environment could help accelerate economic
growth.
A sharp decline in the rupiah would push prices of imported
goods higher, thus creating inflationary pressures. Last month,
inflation accelerated to 5.9 percent from 5.1 percent in March.
The rupiah has been under severe pressure during the past
month as many investors switched some of their rupiah-based
assets to dollar-based assets on expectations that the U.S.
Federal Reserve would start raising its 46-year-low interest rate
next month.
The rupiah fell to a 19-month low against the U.S. dollar on
Tuesday, closing at Rp 9,260 against the dollar.
Indeed, government bond prices in the secondary market have
dropped in recent weeks on interest rate and rupiah concerns,
with foreign investors largely liquidating their positions.