Govt drops third bond issue after lukewarm response
Urip Hudiono, The Jakarta Post, Jakarta
The government canceled plans to auction Rp 2 trillion (US$215 million) in local-currency bonds on Tuesday, following a lukewarm response from investors.
The decision is another blow to the government's efforts to raise funds from public debts, having earlier decided to postpone the offering of at least $1 billion worth of dollar-dominated bonds amid a volatile global bond market.
The government also canceled plans last week to sell a 5.02 percent stake in Bank Central Asia (BCA) after failing to obtain a premium price for the shares.
Ministry of Finance Director General of the State Treasury, Mulia P. Nasution, said on Tuesday the 12-year local-currency bonds were oversubscribed, with the government receiving Rp 2.25 trillion in total bids, higher than the government's Rp 2 trillion target.
However, investors wanted yields of between 10.65 percent and 12.25 percent on the bonds, which would have been higher than the yield in last month's bond sale. The government instead chose to cancel the auction.
"We decided to turn down the bids because their high-yield demands would have made our cost of borrowing too high as well," Mulia said, adding that the government would try to offer the bonds again next month.
Investors' high-yield requests could have something to do with the fact that, at present, the cost of borrowing in emerging markets such as Indonesia is on the raise as the U.S. Federal Reserve continues the upward trend of interest rates amid inflation threats.
The government plans to issue a total of Rp 43 trillion worth of domestic bonds throughout the year, including the $1 billion of sovereign bonds, to help redeem maturing debts and finance the state budget deficit.
In its first bond issue of the year in January, the government sold Rp 5 trillion worth of 10-year bonds priced to yield at 10.12 percent. The sale was more than two times oversubscribed, and was conducted through a highly vibrant auction that received Rp 12.4 trillion in total bids from eager investors.
In the second bond issue in February, the government sold Rp 3 trillion worth of 12-year bonds with a coupon rate -- or initial yield -- of 10.42 percent. The auction received a total of Rp 6.24 trillion in bids.
Last year, the government sold Rp 32.5 trillion worth of bonds, including $1 billion in global bonds.
Despite predictions from many market analysts that Indonesia would do well with its bond sales given the country's improving credit rating, the results of the two bond sales this year indicate the government's local-currency bonds have lost some of their appeal: both their sale value and received bids have declined, while their yields have increased.
Moody's puts Indonesia's long-term local currency debt rating at B2, five levels below investment grade, while Standard & Poor's rates the rupiah debt BB -- two levels below investment grade. Both credit agencies give the country's ratings a positive outlook.