Rp 300t in bonds to be issued in four stages

JAKARTA (JP): The estimated Rp 300 trillion (US$35 billion) worth of bonds for financing the country's bank recapitalization program will be issued in four stages and will carry both floating and fixed interest rates, a central bank executive said on Wednesday.

Bank Indonesia (BI) director Miranda Gultom said gradual issuance of the bonds was necessary to minimize the burden on the state budget and lessen their impact on monetary stability.

"It's unrealistic to issue the bonds all at once because there would be a massive payment obligation (of the government) for the interest," she said.

Miranda said the bonds would also be structured with different maturities to spread the burden of the payment of their interest on state budget.

The government has estimated the interest payments for the total bonds at Rp 34 trillion in the first year, of which Rp 17 trillion will be met by the budget and the remainder by the sales of the assets of liquidated banks.

Miranda said the first bond issue would be used for the recapitalization of banks taken over by the government, the second issue for the recapitalization of the nine private banks which are eligible to join the recapitalization program, the third issue for recapitalizing provincial development banks and the fourth one to recapitalize state banks.

She said the government also was planning to introduce a secondary market for the bonds to allow recapitalized banks to raise liquidity by selling the bonds to investors. This will allow banks to resume their lending activities.

Miranda added the coupon rate of bonds which carry a floating interest rate would be based on the latest interest rate of the three-month Bank Indonesia promissory notes (SBI).

In case there is not an auction on the three-month SBI, the finance minister and the BI governor will use other market benchmarks to set the coupon rate, she said.

She said the maturity of the floating rate bonds would be set between three and 10 years, while the maturity for bonds which carry fixed interest rates would be between five and 10 years.

The interest payments for bonds which carry floating rates will be made every three months, while interest payments for fixed rate bonds will be made every six months, she said.

The government has proposed a fixed rate of 10 percent for the five-year bonds and 12 percent for the 10-year bonds.

Miranda said the government also would issue indexed bonds carrying a coupon rate of 3 percent above inflation.

The government will not limit investment and ownership of the bonds, she added.

She said the bond issue would also provide a benchmark for long-term interest rates in the domestic financial market.

Miranda said BI would support the development of the bond secondary market by acting as a depository agent, clearing and settlement agent, paying agent and prudential regulator.

She said the involvement of the central bank in the secondary market would give BI alternatives other than the SBI as an instrument for its open-market operations.

The government plans to use the bonds to provide up to 80 percent of funding for the recapitalization of nine private banks and 100 percent of funding for the recapitalization of provincial development banks, state banks and banks which were taken over.

The bonds issue is expected to begin in one week.

Almost half of the total bond issue will go to repaying the government's debt to the central bank, which has provided more than Rp 140 trillion in emergency liquidity support to bail out banks hit by massive runs by depositors late in 1997 and the first half of last year, Miranda added. (rei)