Local bond market picks up on lower interest rates

JAKARTA (JP): The local bond market has been consistently picking up since mid-April due to declining interest rates, an analyst said on Wednesday.

Kahlil Rowter, the head of Fixed Income Research at state- owned investment company PT Danareksa said bond trading on the Jakarta and Surabaya stock exchanges was clearly more active.

He said bidding prices had also improved to a range between 80 percent and 90 percent of the bond's face value, from about 50 percent to 60 percent earlier this year.

"Investors are eager to buy bonds for their investment, but often there are not enough quality bonds to purchase in the market," he said.

Rowter said it was high time sound companies that needed external financing took advantage of the current condition to issue bonds.

"Domestic banks for example, are now overliquid and would like to invest in bonds, because they cannot lend money to the real sector for the time being due to continuing high lending rates."

Higher lending rates charged by banks had discouraged companies from obtaining loans, he said, adding that local banks currently charged their borrowers interest rates of about 30 percent per annum despite low deposit rates.

Most local banks have lowered interest rates on their one- month deposits to about 20 percent, with some banks, including state banks, even cutting rates to as low as 14 percent.

Kahlil said the low interest rates had caused many pension funds and other institutional investors to seek other investment alternatives such as bonds, which usually offer higher returns.

The value of the country's domestic corporate bonds floated on local exchanges, mostly on the Surabaya Stock Exchange, have reached a total of Rp 12.9 trillion.

"Our current projection is that there will be a number of new issuances of corporate bonds, worth between Rp 3 trillion and Rp 5 trillion, during the second semester of this year," he said.

During the first semester, there were no new issuances of bonds, while for the whole of 1998 there was only one issuance of a new bond worth only Rp 64 billion by state-owned mortgage house Pegadaian.

An analyst, who requested anonymity, told The Jakarta Post that investors might not be interested in the new issuance of corporate bonds, but instead would choose to wait for the lower risk government bonds.

"Besides, there are very few good quality companies here that are qualified to issue bonds," he said, adding that companies in the pulp and paper industry could be one of those to qualify.

Kahlil said Danareksa had just finished the preliminary assessment for the new issuance of corporate bonds of four companies.

"The issuance of these companies' bonds are subject to the Capital Market Supervisory Agency's (Bapepam's) approval."

He said the four companies -- from the finance, consumer and manufacturing sectors -- were companies of good standing which had not defaulted with any of their creditors.

Kahlil said issuance of the new bonds could inject life into the local bond market which has relatively few liquid bonds.

Easy-sell bonds currently in the market included bonds issued by state owned electricity company PLN and state owned mortgage house Pegadaian, he said.

"The problem now is that it is not always easy to find the sellers of these types of bonds in the market."

He said good quality corporate bonds must be able to compete with government issued bonds.

The government expects to issue bonds worth over Rp 350 trillion to recapitalize the country's ailing banks. The bonds, some of which have been issued, will be traded in the secondary market some time next year. (udi)