Market vote of confidence

Market vote of confidence

Indonesia's first global bond issue since the 1997 financial
crisis was initially designed mainly as a move to test the
waters. But the issue early this week turned out to be so
successful with subscriptions eight times as large as the sum
originally planned that the government decided to sell US$1
billion with a coupon rate of 6.75 percent.

The overwhelming number of subscriptions certainly drove down
the average yield to 6.85 percent, a level more favorable than
other sovereign issuers with better credit ratings have gained.
With a B credit rating from Standard & Poor's that is lower than
most Asian countries and is below the investment-grade quality,
the bond issue could perhaps be considered the best deal of the
year, as Bank Indonesia's Senior Deputy Governor Anwar Nasution
has said.

Since the rupiah will most likely continue to strengthen
against the American dollar and the inflation throughout the year
will not likely exceed 5 percent, the Indonesian dollar bonds
will also be quite attractive for domestic investors, even though
the latest (February) government rupiah bond issue offered a
coupon rate of 11.82 percent.

The greatly positive response to the 10-year bonds reflects a
strong international market vote of confidence in the future
outlook of Indonesia's economy which has become increasingly
brighter due to the stronger macroeconomic stability and the
steadily declining government debt ratio in relation to the gross
domestic product.

To be sure, the credibility of the government in the eyes of
the global markets has been strengthening, especially over the
past two years, due to the steady, significant progress in its
reform measures, notably its high fiscal discipline, despite the
current election year.

The market confidence in the country has indeed been
strengthening -- especially since early 2003, as can be seen from
the inflow of foreign portfolio investment, the strengthening
rupiah relative to the dollar and the steady decline in inflation
and interest rates to below 7.50 percent today.

The steady decline in both international and domestic interest
rates and the strong appetite of global investors in seeking
higher yields in the emerging markets with reasonable risks also
contributes to the positive market reception of the Indonesian
global bonds.

True, as economists emphasize, most of the macroeconomic
indicators are stable, except for one: extremely high
unemployment, and as long as that remains problematic, poverty
also remains, regardless of inflation and interest rate indices.
The economy will remain fragile if the growth continues to hover
at only 4 percent as it has been over the past three years.
Nevertheless, given the fact that Indonesia was a virtual basket
case among the emerging market countries until as recently as
mid-2001, the progress is indeed impressive.

The successful bond issue also serves as the first
international market test of the credibility of the government
after it decided not to renew the International Monetary Fund
program and consequently stop new borrowing from this
multilateral agency as from this year.

The government should not, however, let this heightened market
confidence go to its head, let alone to feel complacent that the
economic roadmap ahead will all be as smooth as the Autobahn.

The next several months when the nation will elect its
legislators and president will be quite crucial for determining
whether the political and macroeconomic stability will continue.

Even though buying Indonesian bonds means investing in the
future prospects of its economy, the great market reception of
the bond issue cannot yet be seen entirely as a clear sign of a
resumption of international investor confidence in the country.

Bonds, though classified as long-term investments, are only a
portfolio investment that can easily be dumped on the market at
the first sign of trouble. Indonesia can be considered successful
in fully regaining foreign investor confidence only after the
inflow of foreign direct investment into fixed assets to build
productive plants, thereby generating employment.

Unfortunately, though, most foreign direct investors still
shun the country due to the slow progress in reform measures to
remove investment barriers, especially inconsistency in policy,
weak law enforcement, uncertainty about regulations in the
provinces due to decentralization and crumbling infrastructure
due to lack of maintenance or new investment.

Whether foreign direct investors will return or not will be
determined by how the market will perceive the new government
emerging from the upcoming elections.

Investors will return in droves if the new government is seen
to be one that is strongly committed to establishing good
governance, especially fighting corruption with strong law
enforcement and continuing with economic reforms.

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