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.