Indonesia's bond market escapes E. Timor turmoil

Indonesia's bond market escapes E. Timor turmoil

HONG KONG (Dow Jones): Indonesia's dollar-denominated bonds
haven't shown much reaction to the turmoil in East Timor, but the
debt market remains concerned about events in the troubled
Southeast Asian country, say analysts.

Spreads for Indonesian sovereign bonds, which aren't widely
traded, have widened mildly since rioting broke out in the
distant Indonesian province over the weekend.

Thursday, the Indonesia 7.750 percent 2006 was quoted at
630/600 basis points over Treasurys, up from Friday's 600/570
basis-point spread.

While the debt market's reaction is far less than the 13
percent drop the rupiah has seen since Monday morning, it comes
amid a broadly pessimistic mood already settling onto the market.
Indonesia's critical presidential elections, the Bank Bali
scandal and lagging economic growth were already weighing heavily
on sentiment, say analysts.

Before the chaos in East Timor broke out, Salomon Smith
Barney's sovereign analyst Stephen Taran predicted spreads on the
Indonesian bonds would gradually widen in the second half "until
political certainty returns."

"In the short-term, the possibility (for worsening spreads) is
definitely there," says a Singapore-based Asia strategist with a
U.S. investment bank. "Things are not going to get a lot better
in the next two to three months."

The turmoil in East Timor comes just as investors and analysts
were growing more comfortable with the country's economic story.

"If it weren't for the uncertainties raised by East Timor, I
would say there's real positive movement in the economy," says
one Hong Kong-based fixed-income analyst with a major U.S.
investment bank who asked not to be named.

"It's almost a shame that these developments in East Timor
have occurred. It revives a lot of uncertainty and investor
skepticism, just when things on the economic side were looking
brighter," this banker says.

Earlier this year, some market watchers and investors were
growing increasingly positive on Indonesia. The sentiment was
punctuated by the smooth conduct of national elections in May.

Looking to the short-term, analysts say they'll be closely
watching any moves by international aid agencies to suspend
disbursements to Indonesia, as well as the government's plans to
renegotiate US$6 billion in Paris Club debt.

Both the International Monetary Fund and the World Bank have
raised the possibility of withholding previously approved loans
to Indonesia, which are critical to keeping Indonesia's economy
going.

The World Bank Wednesday warned Indonesia that a failure to
resolve the chaos in East Timor could threaten about US$5.9
billion in international donor aid for Indonesia pledged last
July, while the IMF said Indonesia has "every interest" in
ensuring the process in East Timor unfolds smoothly and without
violence.

A mid-September IMF mission now appears to be in doubt, which
suggests the next planned disbursement of around $460 million of
the IMF's $12.3 billion loan is also in doubt.

Any postponement in multilateral loans could raise questions
about Indonesia's ability to meet interest payments on
outstanding dollar-denominated debt, including the Indonesian
bonds, some analysts say. However, others play down this
possibility, saying Indonesia's foreign exchange reserves, at
US$15.82 billion, are adequate for meeting any interest payments
on public debt.

Investors are also troubled by the prospect of Indonesia
technically defaulting on its publicly traded floating rate note
due February 2001.

Although such a possibility was raised earlier this year,
Coordinating Minister for Economy and Finance Minister Ginandjar
Kartasasmita this week was quoted saying the government is
formally requesting Paris Club creditors to reschedule $6 billion
in bilateral debt for the period up to the fiscal year ending
March 30, 2001.

The Paris Club, if it follows a precedent established last
year with Pakistan, is expected to demand eurobond holders, which
are normally excluded from such rescheduling, to be included.
Indonesia has already rescheduled $4.2 billion in debt that fell
due in the current fiscal year.

Nevertheless, analysts say that while they expect some
weakness in Indonesian bonds, the paper is likely to hold up
relatively well despite serious questions about the country's
political and economic direction.

"Investors (in Indonesia) have a pretty healthy risk appetite.
They're not going to panic. They're in there looking for
significant upside," says Scott Wilson, sovereign analyst at
Warburg Dillon Read, adding that debt restructuring could provide
that upside.

"You're going to see some marginal weakness, but I don't think
it's going to be a lot of selling," he said.