Regions show greater interest in deficit bonds

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)