Pension funds can freely invest in govt bonds
Pension funds can freely invest in govt bonds
JAKARTA (JP): The finance ministry will soon issue a new
ruling allowing the country's pension funds to invest up to 100
percent of their money in government bonds, director general of
financial institutions Darmin Nasution said on Wednesday.
Darmin said that the new measure was expected to activate the
trading of government bonds in the secondary market.
"We expect the new ruling to be completed within a week," he
told reporters on the sidelines of a meeting with the House of
Representatives special team on the amendment of the central bank
law.
Under existing rules, pension funds can only invest up to 20
percent of their money in a single bond issue in order to spread
the risk.
But Darmin said that since government bonds were considered to
be a risk-free investment, pension funds will be allowed to
freely invest all their money in the bonds.
The government has issued more than Rp 600 trillion (US$64
billion) worth of bonds, of which around Rp 430 trillion were
injected into the country's recapitalized banks.
The government injects bonds instead of cash to help
recapitalize ailing banks to boost their capital adequacy ratio
(CAR) to beyond the minimum 4 percent level.
But the recapitalized banks have faced difficulties selling
bonds in the secondary market due to the lack of appetite from
investors.
Government bonds carry a fixed interest rate and variable
interest rates linked to the interest rate of Bank Indonesia SBI
promissory notes.
The government late last year issued a new ruling to allow
recapitalized banks to exchange part of their 12 percent fixed-
rate bonds with government bonds carrying a higher rate of 16.5
percent. The measure was made to lure investors to government
bonds.
Some 14 recapitalized banks have applied to exchange their
fixed-rate bonds worth Rp 58.47 trillion with so-called stapled
bonds which carry both higher and lower interest rates. Some 30
percent of fixed-rate bonds will be swapped with higher-yield
bonds, but another 70 percent will have to be exchanged with
bonds carrying a lower interest rate of 10 percent.
The new ruling on pension funds, however, may spell trouble
for domestic banks as it could encourage pension funds to
withdraw their money from the banking sector.
The amount of pension funds in 1999 totaled Rp 27 trillion,
and most were invested in bank time deposits.
Darmin dismissed such a concern.
He said that with the new ruling, the government would not
force pension funds to invest in government bonds.
He said that investment in government bonds by pension funds
would be solely determined by "pure business calculation."
"The government will not force pension funds to invest in
bonds. There is no such obligation," Darmin said.
He pointed out that if the interest rate on bank time deposits
rose to 15 percent, pension funds might prefer to keep most of
their money in banks compared to government bonds which only
carried a fixed interest rate of 12 percent.
Domestic banks have been under pressure to work hard to
maintain their depositors after the government raised income tax
on time deposits and savings to 20 percent from the previous 15
percent rate.
The interest rate on three-month bank time deposits currently
hovers at around 12 percent at some banks.
But if banks are forced to further raise the interest rate, it
could create a negative spread problem particularly for those
banks whose assets are dominated by government bonds with a fixed
interest rate of 12 percent.
Elsewhere, Darmin said that the government planned to propose
a draft law on bonds next month to the legislature.
The law would become a legal basis for the central government
and regional administration to issue bonds in the future.
Darmin did not provide further details about the new bill.
(rei)