Regions show greater interest in deficit bonds

JAKARTA (JP): Interest in "deficit" bonds is growing as more of the wealthy provinces seek attractive investment options to spend their budget surpluses, a senior government official said on Thursday.

Director general for fiscal decentralization Machfud Sidik said regions' initial doubts faded after they found out more about the bonds.

"After hearing they'll get interest payments, that government bond ratings are better than corporate ones, and that bonds are tradable, they showed more interest," he told The Jakarta Post on the sidelines of the launching of an information and accounting system for regional governments.

However, he said it was too early to name the provinces that were interested to invest in deficit bonds.

"We've picked up their interest during dialogs, but we haven't approached them individually," he said.

Earlier the government had said it was difficult to persuade regions to buy the deficit bonds as they needed more information.

He said the government had made the deficit bonds more attractive by offering negotiable coupon rates and maturity terms.

"We will negotiate the coupon rates on an individual basis with the regions," he said.

The government had initially proposed to issue around Rp 2.9 trillion (US$254 million) worth of deficit bonds to help contain the 2001 state budget deficit at a safer level of around 3.7 percent of gross domestic product (GDP).

But the House of Representatives later decided to limit the issue of bonds at only around Rp 886.7 billion to avoid any political backlash from provinces and districts.

The deficit bonds are part of various measures proposed by the government to resolve the current budget deficit problem which some say could widen to a disastrous level of 6 percent of GDP due to the sharp plunge in the value of the rupiah and rising domestic interest rates. The other measures include raising fuel prices and electricity rates.

Wealthier provinces and districts are expected to purchase the deficit bonds.

The central government initially intended to provide a general grant (DAU funds) to help provincial and district administrations finance their new autonomy. But due to the state budget crisis, Jakarta later asked the wealthier regions with large revenue from natural resources such as oil, gas, mining and timber to exchange part of their DAU funds with government bonds.

The government has said that the wealthier regions were estimated to enjoy a surplus of about Rp 28 trillion in the current budget year.

Machfud said his office would meet with Bank Indonesia to decide on the final structure of the deficit bonds including the coupon rate and maturity period.

"Of course we have our own concept, but we need to discuss it with Bank Indonesia first because (the central bank) has the authority on inflation and interest rate trends," he said.

Machfud declined to disclose the structure of the bonds, but he said that the government wanted the bonds to carry a fixed interest rate to help minimize the burden on the state budget, and to have a maturity period of more than eight years.

"We have to make the bonds attractive," he said, pointing out that the deficit bonds must be more attractive than the bank recapitalization bonds already issued by the government.

The government has issued around Rp 430 trillion worth of bank recapitalization bonds carrying a combination of variable interest rates and a fixed rate of 12 and 14 percent.

In comparison, the benchmark interest rate of Bank Indonesia one-month SBI promissory notes has already surged to 16.55 percent.

Machfud said that the deficit bonds must have a maturity period of more than eight years because between now and 2009, the state budget would be heavily burdened with the interest payments on the bank recapitalization bonds estimated at around Rp 50-60 trillion per year.

Following the state budget revision, Machfud said, the government could go ahead with the offering of the bonds.

Talks with regions have been conducted before, although without negotiating a deal, he said.

According to him, regions with a small budget surplus are unlikely to be spending it on the deficit bonds.

"On the other hand, regions with significant budget surpluses are scrambling to invest them in whatever way possible," he said. (rei/bkm)