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)