Tue, 01 Jun 1999

Market analysts skeptical about government bonds

JAKARTA (JP): The Rp 103.83 trillion (US$12.82 billion) worth of government bonds issued last week are unlikely to receive a good response from foreign investors when they are launched in the secondary market next year, according to local analysts.

Alferno Sunardji, head of the fixed-income division at PT Sigma Batara Securities, said on Monday foreign investors would remain reluctant to invest in rupiah-based bonds because of anticipated volatility in the currency, particularly in view of continuing political and social uncertainties.

"Unless there's a significant positive development in the social and political condition, only a limited amount of the bonds will be absorbed by the market," he told The Jakarta Post

On Friday the government announced the flotation of bonds worth Rp 103.83 trillion to recapitalize 11 private banks and 12 provincial development banks.

The bonds carry two types of interest rates.

The floating-rate bonds worth Rp 95.15 trillion have an interest rate linked to Bank Indonesia's 3-month SBI promissory note rates, payable on a quarterly basis, and with a maturity period of between three to 10 years.

The fixed-rate bonds worth Rp 8.68 trillion, with a maturity period of five years and 10 years, carry fixed interest rates of 12 percent and 14 percent respectively.

The bonds will be registered on the banks' balance sheet as government equity shares to lift their capital adequacy ratio (CAR) to the minimum 4 percent level for the private banks, and to the 8 percent level for the development banks.

CAR is the ratio between capital and risk-weighted assets.

The government will allow the bonds to be traded in the secondary market at the start of 2000 after all preparations are completed, particularly those relating to Y2K compliance.

Alferno considered foreign investors as the only potential buyers of the bonds, because local investors no longer had sufficient funds to make the investment.

"Liquidity is quite tight among local investors. A daily turnover of Rp 50 billion in current corporate bond issues is already considered big enough."

Alferno added that foreign investor enthusiasm for the bonds would depend on political and social stability in the country.

President of securities firm PT Tri Megah Securindo Lestari David Chang concurred.

"Foreign investors are currently only looking at U.S. dollar- based bonds because they're still uncomfortable with the rupiah," he said, adding that investors could remain edgy over the next six to 12 months.

But he disagreed with Alferno's pessimism about local investors.

"There will be a strong demand from local investors, particularly from pension funds, because the instruments are state bonds."

Laksono Widodo, head of research at ING Baring Securities, said the coupon rate of the bonds should have been set at a premium to the 3-month SBI note rate, due to Indonesia's high country risk.

He said Indonesia's country risk would remain very high until next year.

"There's a strong likelihood that the banks won't sell the bonds into the secondary market early next year," he said, adding that a lively secondary market might only return in two years time.

Indonesia has been mired in political infighting and social unrest since the downfall of former strongman Soeharto in May last year when the economic crisis heightened.

Riots have occurred in several parts of the country ahead of the upcoming June 7 general election, the country's first open and multi-party election after more than 30 years under the authoritarian rule of Soeharto.

Although many analysts welcome the government bonds issue as a positive step for the bank recapitalization program, some have been discouraged by the slow progress made in efforts to recover massive non-performing bank loans, the bulk of which are owed by well-connected businessmen.

Analysts say the bank recapitalization program and corporate restructuring are essential for the economy to recover from the crisis. (rei)