'RI bond market to grow at healthy clip'

'RI bond market to grow at healthy clip'

I Made Sentana, Dow Jones, Jakarta

Indonesia's primary bond market is expected to continue its robust expansion in 2003 as corporates issue more debt amid falling domestic interest rates and a limited availability of bank loans, analysts say.

With local banks still unable to provide much new loans because of their poor capital base, analysts expect Indonesian firms to continue to turn to the debt market for their borrowings.

Corporate bond issuance in 2003 is expected to easily match this year's Rp 5.4 trillion (US$606 million), or more than double the Rp 2 trillion recorded in 2001.

In addition, the government is expected to sell about Rp 7 trillion in state bonds and treasury bills in the first quarter of 2003, after Rp 2 trillion in eight-year bonds were issued earlier this month.

And with the improving market liquidity and sliding domestic interest rates, investors, too, are taking a second look at Indonesian paper.

Stung by a string of defaults from heavily-indebted Asia Pulp & Paper Co.'s Indonesian units in 2001, investors - used to shunning Indonesian paper - have started returning to the local bond market, after a 425-basis-point fall in the benchmark Sertifikat Bank Indonesia one-month weighted average rate to 12.99% this year made it more attractive to put money into bonds.

And although local interest rates aren't expected to fall as much next year, analysts say strong demand for new bonds will remain, as new issuers will likely continue to entice the market with coupons higher than yields offered on banks' time deposits and Bank Indonesia notes.

Domestic telephone operator PT Telekomunikasi Indonesia in May and its sister company, overseas call service provider, PT Indonesian Satellite Corp., in October sold their bonds at a premium of about 200 basis points over SBI rates, while some smaller companies offered an even higher premium - of up to 300 basis points.

"Bonds and other fixed income instrument will remain attractive to investors in 2003," said Paulus Nurwadono, head of debt research at the state-owned PT Danareksa Sekuritas.

Lingering uncertainties about the local stock market's prospects next year will keep local investors hungry for bond investments, while a more relaxed regulatory regime is also expected to underpin further bond issuance, analysts say.

For the first time, starting next year, local companies will be allowed to issue dollar-denominated bonds in the country. Currently companies are only allowed to issue bonds denominated in foreign currencies overseas.

PT Telekomunikasi Selular Indonesia's $150 million bond sale in May - the first big successful international debt offering by an Indonesian firm since the 1997 crisis - brought local blue chip issuers back onto investors' radar screen. The PT Telekomunikasi Selular Indonesia issue was rated B+ by Standard & Poor's.

Still, analysts say, for investors to want to park their money into Indonesian paper, which are essentially still considered risky investments, future dollar-denominated issues would have to come from firms with strong cash-flow and dollar-denominated earnings.

In the secondary bond market, the sharp fall in interest rates this year also bolstered liquidity, which analysts say will help reduce liquidity-related risks for the more frequently-traded bonds.

According to the Surabaya Stock Exchange where local bonds are listed, the average daily trading volume of corporate bonds this year rose fivefold to Rp 22.60 billion from Rp 4.53 billion last year.

Average daily trading volume of government bonds in 2002 jumped to Rp 515 billion from Rp 26.3 billion last year as banks unloaded their holdings of government bonds that they were required to take up in exchange for recapitalization, after the banking sector suffered a near collapse from the Asian financial crisis of 1997-98.

Local lenders were then required to hold on to government bonds for a specified period, to avoid an oversupply situation in the secondary market.

And with another Rp 7 trillion of six-month and one-year T- bills and government bonds anticipated early next year, analysts expect liquidity in the secondary bond market to further improve. A more liquid debt market will provide more opportunities for the private sector to fund some of the government's borrowings in the future.

Many of the government's over Rp 600 trillion bonds are due for repayment in the next couple of years and that will place a major strain on state finances. The government will have to repay Rp 80.7 trillion in bonds in 2004 - more than twice the total in 2003.

But while liquidity is improving, transparency issues continue to dog bond trading here, which analysts say the introduction of market makers - as opposed to the over-the-counter transactions currently - will help alleviate.

Analysts expect firms likely to tap the debt market next year to come from the energy, toll road, telecommunications, financing, pharmacy and fertilizers sectors. Those sectors are likely to experience robust growth, and companies hence likely to need more capital as they expand their businesses to meet rising demand.