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)