Govt's second bonds issue fails to reach target

The Jakarta Post, Jakarta

The government's second bonds issue on Tuesday turned out to be somewhat a failure, as demand from investors was insufficient, forcing the government to cut the size of the issue.

While the initial target had been set at Rp 5 trillion (about US$650 million), Tuesday's auction saw the government only manage to issue Rp 3.9 trillion worth of bonds.

Fuad Rahmany, head of the Ministry of Finance's state bond division, told reporters that the bonds' longer-term maturity profile may be the reason for the lack of demand.

"Investors may no longer be interested in long-term bonds," he told a press conference.

The bonds, which carry a weighted average yield of 11.6 percent, are due to mature in December 2012. The bonds have an 11 percent coupon payable twice a year.

The government had hoped to issue up to Rp 5 trillion worth of bonds to help cover the 2003 budget deficit by retiring some higher-yielding bonds issued during the crisis.

But, the result of Tuesday's auction paled by comparison, especially if compared to the previous bonds issue.

In April, the government's first bond issue, worth Rp 2.7 trillion, was a success with the bonds 2.8 times oversubscribed.

To mature in 2011, these bonds carry a 12 percent fixed-rate coupon and were priced through an auction with a weighted average yield of 12.21 percent.

A similar success story was also recorded late last year, when a Rp 2 trillion bonds issue was also oversubscribed.

All these have raised optimism that the government's new bonds issue would be oversubscribed again particularly as foreign investors have been looking for local assets with higher yields amid the global weakening of dollar assets.

Darmin Nasution, the director general of financial institutions at the finance ministry, said the government was studying the mediocre results of the new bonds issue.

"We are now studying why the demand had been insufficient. It could be because the tenor is too long," said Darmin.

The government has said the bond scheme is critical in helping to avoid a fiscal disaster in the future and maintain investor confidence.

The state budget has been heavily burdened by the payment of maturing bonds totaling about Rp 450 trillion that were issued in the late 1990s to bail out troubled banks.

To ease the interest burden, the government launched the bond scheme, meaning it will issue new bonds to refinance the maturing ones.

Despite the lower-than-expected results, Fuad claimed the amount was enough to cover the current financial needs, and that the government still had time to better prepare its next bond issue planned for this year.

Previously, this year's bond issue had been earmarked at Rp 7.7 trillion, but the government is currently seeking approval from legislators to increase the size to Rp 11.7 trillion due to the higher than expected budget deficit.

The latest auction pushes the state bonds issue this year to Rp 6.6 trillion so far, meaning the government would have to issue another Rp 5.1 trillion in bonds in the next three months or so.

The weak result could also affect the government's plan to issue around $400 million worth of international bonds early next year, to help seek financing for the state budget as the country will no longer obtain financial assistance from the International Monetary Fund when the existing program expires at the end of this year.

Results of new bonds auction (No. FR0023)

Total bids (Rp) 4,700.5 billion

Total bonds sold (Rp) 3,995.5 billion

Weighted average yield (%) 11.60

Date of issuance Sept. 11, 2003

Date of maturity Dec. 15, 2012

Date of yearly interest payments June 15, Dec.15

Source: The Ministry of Finance