Govt to consult with BI before launching higher rate bonds
Govt to consult with BI before launching higher rate bonds
JAKARTA (JP): The government must consult with Bank Indonesia
before allowing banks to exchange part of their fixed-rate
recapitalization bonds with new bonds carrying a higher coupon
rate, the director general of financial institutions, Darmin
Nasution, said over the weekend.
Darmin said the talks with Bank Indonesia were needed to
ensure the plan would not be counterproductive to the central
bank's monetary policy.
"We must talk with Bank Indonesia first .... (find out if)
Bank Indonesia going to be disturbed by the (higher) interest
rate," he said on the sidelines of a hearing on the 2001 state
budget with House of Representatives Commission IX for the state
budget and banking.
He said the Ministry of Finance was scheduled to meet with
Bank Indonesia on Tuesday.
The government initially planned to launch the so-called
stapled bonds by the end of this month.
Darmin said that only after the meeting would the government
decide whether to proceed with the plan or delay it.
He said that in addition to the monetary issue, the talks with
the central bank were also needed because Bank Indonesia would
oversee the secondary market for the bonds.
The government has just completed the country's bank
recapitalization program. Instead of injecting cash into the
banks, the government issued bonds worth more than Rp 450
trillion (US$48 billion).
Despite the costly bank recapitalization program, domestic
banks have yet to resume lending to the cash-strapped real
sector, as the bonds have received a tepid response from
investors.
In a bid to attract buyers, the government is planing to
introduce stapled bonds carrying an interest rate of between 15
percent and 16 percent, well above the interest rate of Bank
Indonesia's one-month SBI promissory notes, currently at 14.02
percent.
With an interest rate of between 12 percent and 14 percent per
annum, the recapitalization bonds have failed to attract
investors.
More than Rp 150 trillion of the bonds carry fixed interest
rates of 12 percent and 14 percent. Another Rp 218 trillion of
the bonds carry a variable rate linked to the interest rate of
the one-month SBI notes. The remaining bonds are indexed rate
bonds.
But raising the interest rate may have negative consequences
on the central bank's efforts to curb inflation.
The recent increase in fuel prices and transportation costs,
the year-end festivities and the weakening of the rupiah against
the US dollar have created strong inflationary pressure, raising
concern that inflation spiral out of control.
Indeed, the government and the central bank have revised
upward its inflation target for this year to 8 percent from the
initial projection of between 5 percent and 7 percent.
A high inflation level would derail the country's efforts to
revive its crisis-hit economy.
Bank Indonesia recently increased its benchmark interest rate
in a bid to curb inflation and help stabilize the rupiah.
The rupiah has been hovering at around Rp 9,400 against the
dollar, more than 20 percent lower than earlier this year.
Under the government's plan, certain banks would be allowed to
exchange up to half of the fixed-rate bonds with the stapled
bonds. The government would decide which banks are eligible for
the new facility.
If the banks agree to exchange the recapitalization bonds with
the higher coupon rate bonds, they must also agree to allow the
interest rate of the remaining bonds to be lowered so the burden
on the state budget will not increase.
"The interest rate cost covered by the government must not
change," Darmin said.
The price of the interest rate on government bonds next year
has been estimated at more than Rp 55 trillion. Combined with the
interest charges on the government's foreign debt, this figure
will increase to more than Rp 77 trillion, or more than 41
percent of the government's routine expenditure.
Meanwhile, a source said the plan to launch the stapled bonds
at the end of this month might have to be delayed, in part due to
the recent resignation of several top Bank Indonesia officials,
including senior deputy governor Anwar Nasution and four deputy
governors.
The source said the resignations had created a leadership
vacuum at the central bank.
But Bank Indonesia has repeatedly said that despite their
resignations, the senior deputy governor and the deputy governors
will continue to guide the central bank until their successors
are appointed.(rei)