T-bonds well received

T-bonds well received

The positive reception toward the Rp 2.7 trillion (US$300
million) in eight-year Treasury Bonds, which were issued on
Tuesday through the first public auction the government has ever
held, reflected a higher market confidence in the government's
willingness and ability to repay its debts on time.

No further details were immediately available as to which of
the 42 bidders finally got the T-bonds that were about three
times oversubscribed. But the composition of the bidders -- 10
foreign banks, two joint venture banks, 21 national banks and
nine non-bank finance companies -- shows the wider mix of
investors in the government securities.

The higher confidence in the government's ability and
willingness to service its local-currency debts means stronger
credibility of its fiscal and monetary management and inflation
control.

There have indeed been significant improvements in the
macroeconomic and political environment that affect the
government's credit risk. The law on government securities that
was enacted last September has provided a stronger legal
foundation for the government to issue debt instruments. The
government's total debts (foreign and domestic) as a percentage
of the gross domestic product has declined sharply from almost
100 percent early last year to around 70 percent at present.

Likewise the government debt service ratio against tax
revenues is estimated to decrease from 33.4 percent in 2003 to 30
percent in 2006. The rupiah exchange which last year appreciated
by around 17 percent against the American dollar has continued to
strengthen this year. This in turn will ease the pressure from
imported inflation and reduce foreign debt service burdens.

The politically autonomous Bank Indonesia, which is mandated
to ensure price stability, makes investors confident that the
government will not be able to monetize its budget deficit.

On a negative note, though, the over-subscription also
reflects the high level of excess liquidity in the banking
industry, a much lower than-expected rate of credit expansion and
the severely limited number of feasible viable business
opportunities for investment.

The good market reception will nevertheless create a virtuous
circle within the government fiscal management because it will
further encourage further T-bond issues and this in turn will
enable the government to repay large sums of bonds maturing
within the next three years, thereby improving its debt
sustainability through longer maturities. In fact, the government
is scheduled to issue Rp 2.5 trillion in T-bonds and Rp 2.7
trillion in T-bills (short-term instruments) within the next few
months.

A larger volume of securities will at the same time increase
the liquidity in the secondary market, especially after the
launching of the inter-dealer market through the Indonesian
Government Securities Trading System last month. Transactions in
government bonds have indeed increased from Rp 10.8 trillion a
month last year to Rp 35.2 trillion a month during the first
three months.

The weighted average yield of 12.21 percent resulting from the
competitive bids for the T-bonds that carry a fixed coupon of 12
percent was slightly lower than the 12.40 to 12.50 percent range
expected by analysts but was slightly higher than the 12.10 to
12.20 percent yield of government bonds in the secondary market
one day before the auction. The yield also was 81 basis point
higher than the central bank's benchmark one-month interest rate
last week.

The yield reflects investors' expectations that inflation
will be checked at a single digit, the rupiah exchange rate will
remain stable at best or slightly depreciate at worst, and the
central bank will further slow the incremental decrease in the
interest rate.

So all in all, as the yield is an average of expected future
interest rates plus some sort of risk premium, the new primary
issue of government securities through a competitive bidding
should be welcomed as they created a new market gauge to predict
economic trends such as the rate of economic growth, inflation
and changes in monetary and fiscal policies.

The government benchmark will in turn serve as a risk-free
reference parameter for the relative risk profile of ordinary
debtors like corporations or banks.