Next year wrong time to issue sovereign bonds: Economists

Fitri Wulandari, The Jakarta Post, Jakarta

Contrary to what some foreign investment bankers have suggested, local economists say that early next year would not be the right time to issue sovereign bonds given the country's low international rating.

Economists Sri Mulyani Indrawati and Anton Gunawan both said that issuing bonds in a low rating environment would be costly for the government as investors would demand a huge discount to cover the risk.

The country's current international rating is triple C, which is below investment grade.

"Investors might be interested, but they would ask for a discount because the low rating creates higher risk," said Anton, an economist at Citibank office in Jakarta, over the weekend.

The government is considering issuing sovereign bonds as part of a financing strategy for the 2004 state budget, amid the prospect of shrinking financial assistance from foreign lenders as the country's current International Monetary Fund (IMF) program will end later this year. The government is facing rising political pressure not to extend the IMF program, which will cost the country around US$3 billion in debt rescheduling facilities from the Paris Club of creditor nations and the London Club of private lenders.

Some foreign investment bankers have reportedly told both the government and central bank officials that the sovereign bond issue could be launched as early as next year on the back of strong interest from investors amid limited supply in the international market, and positive data in the area of macroeconomics.

But Sri said that issuing sovereign bonds was like selling an image of a country, and if the rating was low, the proceeds from the bond issue would not be optimal.

"If we (Indonesia) have a poor rating, investors can argue that the bonds should be discounted because they will take into account our export performance, stability, state budget deficit and balance of payments," said Sri, who is also the IMF executive director for the Southeast Asia region.

But proponents of the sovereign bond issue argue that the country's rating would be raised once it stops seeking debt rescheduling for its sovereign debts, a likely scenario under the plan to terminate the IMF program.

Minister of Finance Boediono said the government had not yet decided whether it would issue sovereign bonds next year, saying it had yet to consider various options, including the impact of the 2004 general election and the possible military strike in Aceh on investor sentiment and the overall economy.

Anton said that in addition to pushing through privatization and the asset sale program, and boosting tax revenue, the government should intensify bilateral talks with main creditor nations like Japan, and also through the Consultative Group on Indonesia (CGI) to secure fresh loans and other kinds of support.

CGI is the country's traditional international donors grouping.

If the planned bond issue is realized, it would be the country's first sovereign offering since the 1997 economic crisis.

In July 1996, the country issued Yankee bonds worth $400 million that mature in 2006.