Market shuns T-bonds
Indonesian enterprises, which sorely need working capital to raise production rates amid heightened consumer confidence, may have to wait a longe time before significant bank lending resumes. The reason being recapitalized banks seem unable to sell the treasury bonds (T-bonds) which currently sit on their balance sheets as quasi capital.
Even though the government, beginning on Feb. 1, allowed the trading through the Surabaya stock exchange of about Rp 19 trillion (US$2.6 billion) of the Rp 282 trillion in treasury bonds issued last May to recapitalize banks, the market sentiment seemed very weak. The stock exchange's director Anton Natakoesoemah said last week there had so far been only one bid for the government bonds, but no transaction was closed as the bidder, wanting Rp 5 billion in bonds, asked for a 20 percent discount. That seems strange, especially since the bank recapitalization bonds are the first rupiah debt instruments issued by the government since the 1950s.
Moreover, both the political and macroeconomic conditions now appear conducive for reviving the bond market, which has been virtually lifeless since mid-1997 when the rupiah melted: political stability has been strengthening; the central bank's benchmark interest rate has fallen to 11 percent from as high as 25 percent last June; inflation is down to less than 3 percent last year from more than 70 percent in 1998; and the rupiah rate has been stabilizing at a range of Rp 7,000 to Rp 7,300 to the American dollar. The central bank has forecast inflation this year at 5 percent to 7 percent, economic growth at 4 percent and the rate of the rupiah at an average Rp 7,000 to the dollar.
What went wrong? Natakoesoemah shared analysts' views that lack of familiarity with the scriptless trading process for bonds and the low yield on T-bonds, compared to that offered by corporate bonds, were the biggest barriers to bond sales.
The 12 percent interest rate on the fixed-rate T-bonds and the 2 percentage-point to 3 percentage-point premium over the central bank's one-month benchmark rate set for floating T-bonds seem unattractive indeed, compared to 17 percent to 17.5 percent yields offered by corporate bonds.
There seems to be three alternative ways out of this impasse. Either the banks sell the bonds with a large discount; the government raises the yield on the fixed-rate bonds to decrease the gap between the yield on the T-bonds and corporate debt paper to a maximum of 2 percentage points; or, the central bank itself goes to the market to buy the bonds.
But none of these solutions appears feasible now. Selling bonds at big discounts means raising bond prices and pressuring interest rates at the expense of the central bank's concerted bid to steadily push down interest rates. It is, likewise, almost impossible for the government to raise the bond's yield, as this would sharply increase its domestic debt service burden, which for the next fiscal year (April 2000 to Dec. 2000) alone is estimated at Rp 42.3 trillion. Neither can the central bank absorb the bonds by itself, as such a move would surely cause tremendously strong inflationary pressures and unsettle the rupiah rate.
The dilemma, though, is that if banks cannot sell a portion of the bonds soon, they will have to rely mostly on the bond's interest income, which is certainly not adequate to enable them to resume lending -- so far still the biggest source of income for most banks in the country. In fact, a longer delay for banks to get additional liquidity by selling the bonds would threaten to erode their capital base and eventually devastate the costly bank restructuring program. It should be remembered that the recapitalized banks, though in number only accounting for less than 10 percent of the whole banking industry, make up more than 80 percent of the whole industry's assets.
Given the urgency of the problem and the real threat to the survival of recapitalized banks, the government should intervene immediately to kick start T-bond trading. Ordering cash-rich government institutions such as the Jamsostek labor welfare fund, the Taspen civil servant pension fund and several state insurance companies to soak up a great portion of the bonds would be an effective first step to break the ice.
Increasing the liquidity of T-bonds through active trading would not only inject fresh funds to recapitalized banks to generate lending, but would also set a long-term yield curve or a long-term benchmark interest rate for rupiah debts because the longest maturity period of the central bank's debt papers (certificates, or under its local acronym SBI), currently the only benchmark for interest rates, is only three months.