Rp 40t planned in new bonds to secure IMF deal

JAKARTA (JP): The government announced on Tuesday that it planned to issue bonds worth Rp 40 trillion (about US$4.67 billion) in the near future, as part of a set of preconditions designed to secure an International Monetary Fund (IMF) lending agreement.

Minister of Finance Boediono said the government is seeking legislators' approval before issuing more bonds.

"The Rp 40 trillion equals roughly 5 percent of our banks' total liabilities, amounting to some Rp 800 trillion," he told reporters after a meeting with House Commission IX, which oversees financial affairs.

Boediono, however, did not explain why the size of the bond issue was larger than the Rp 30 trillion originally proposed.

The bond issue is one of six "prior actions" the government must undertake before the IMF will agree to signing a new lending agreement, called a Letter of Intent (LoI), with the government.

The government expects to be able to sign a new LoI on Thursday to restart a $5 billion IMF loan program suspended late last year.

Proceeds from the bonds will be used to cover the government sponsored blanket guarantee scheme for the banking sector.

The scheme was established to instill public confidence in a banking sector crippled by the 1997 economic crisis.

Under the scheme, the government will guarantee bank customers the safety of their deposits in the event of a bank's closure.

This safety net has become more important with Bank Indonesia's requirement that banks have a minimum capital adequacy ratio (CAR) of 8 percent by the end of this year.

The CAR measures the ratio between a banks capital and risk- weighted assets.

Those unable to meet this criteria face either closure or the possibility of a merger with a stronger bank.

As several banks may not be able to meet the CAR target, the IMF demanded that the government replenish its guarantee funds.

When the government initiated the blanket guarantee scheme in January 1998, it raised Rp 53.77 trillion in bonds.

Boediono did not say how much of that amount remains.

He said the government will issue the bonds to Bank Indonesia, which is responsible for the blanket guarantee scheme, meaning they will not be traded in the secondary market unless the central bank is required to replenish the guarantee scheme fund.

Details over the structure of the bond issue remain sketchy, but government officials said they would most likely carry a fixed interest rate.

Boediono assured that the bonds would have little impact on the state budget, as interest payments would only begin if the proceeds were used for the blanket guarantee scheme.

Asked when the government planned to issue the bonds, he said it must discuss the schedule with the IMF first.

Economists have warned the government against issuing more bonds because such a measure would add to Indonesia's debt burden.

Previously, the government has issued bonds worth around Rp 430 trillion to recapitalize the banking sector.

It raised another Rp 144.5 trillion in bonds to provide emergency liquidity for banks hit by massive runs in 1998.

The government has said it would reduce the blanket guarantee scheme funds starting next year, in line with growing confidence in the banking sector.

Commission IX chairman Benny Pasaribu was unable to say when legislators could approve the bond issue plan.

"But, from our colleagues present at the meeting, there doesn't seem to be any objection," he said.

Boediono said that, except for the bond issue plan, the government had met almost all of the six prior actions stipulated by the IMF.

Others include the announcement of an independent review of several major debt restructuring deals and the reduction of the country's primary money supply to Rp 108 trillion.

An IMF high-level mission has been in Jakarta since Sunday to review Indonesia's progress in meeting reform targets.

Led by the Fund's Asia Pacific deputy director Anoop Singh, the team is expected to finalize the eagerly awaited LoI.

A new LoI would pave the way for the resumption of the IMF's $5 billion aid package to Indonesia and facilitate disbursement of a $400 million loan tranche suspended late last year due to concern over the previous administration's commitment to meeting economic reform targets.(bkm)