Tax breaks urged for treasury bond trade

JAKARTA (JP): Deutsche Bank has called on the Indonesian government to provide tax incentives to stimulate the trading of treasury bonds on the local debt market.

Deutsche Bank Indonesia's head for global markets and country treasurer, Suresh L. Narang, said over the weekend appropriate tax breaks were needed to provide liquidity in dormant bond trading.

"I think what the government needs to look at is a set of accounting and tax breaks for the holders of these bonds," Narang said during a media conference following a seminar on the debt market.

The government has injected some Rp 282 trillion (US$37.80 billion) worth of T-bonds to finance the country's costly bank recapitalization program.

Since early February, banks joining the recapitalization program have been allowed to trade Rp 19 trillion worth of treasury bonds in the secondary market to raise funds to support their lending operations. But no significant transactions have occurred so far, due to a lack of interest from both local and foreign investors.

The idea to provide tax breaks for the bonds has received a positive response from monetary officials.

Bank Indonesia deputy governor Miranda Goeltom conceded last week that providing tax breaks would lure foreign investors into the bonds.

She also said introducing a system of tax breaks was normal practice in other countries, with some countries introducing tax breaks when the bonds were first launched, while others provided tax breaks years after the bonds were traded in the secondary market.

There are a number of reasons why investors have been hesitant to buy Indonesia's treasury bonds.

However, fixed income analysts said one of the major problems was the perceived poor liquidity of the bonds.

Bank Indonesia has said it planned to introduce several "market makers" to create an active trade of the bonds in the market.

The central bank has said it intends to pick a combination of foreign and local market makers with strong capital, extensive networks and capable human resources.

Miranda said numerous financial institutions, both local and foreign, had expressed interest in becoming market makers, but claimed the central bank had yet to complete the selection process.

But a source familiar with the process said the central bank had selected Citibank, Bank Mega and PT Danareksa Securities.

There also have been reports that Standard Chartered and state Bank Mandiri have applied to become market makers.

Loh Boon Chye of Deutsche Bank in Singapore said that at the current early stage of trading in the bonds, the central bank should only appoint between seven and 10 market makers.

"I think the right number of market makers at this stage would between seven and 10. That's what Bank Indonesia has also stated.

"Given that its the beginning of the market, it's not prudent to have a very large number of market makers," he said.

Narang said Deutsche Bank had a strong interest in becoming a market maker, and that it had held initial talks with the central bank.

He said Deutsche Bank recently had been named a market maker in Hong Kong and Taiwan, and also was seeking to become one in South Korea.

"And also in Indonesia, it is our objective to become a market maker," he said.

He said Deutsche Bank was committed to developing the local debt market in Indonesia, to help both the corporate sector raise short-term and long-term funds and investors seek fixed-income instruments.

Narang said the bonds market would play a vital role in efforts to revive the country's crisis-hit economy, because banks still were unable to fully resume their intermediation role following the financial crisis.

"The capital and bonds markets are playing an increasingly important role in the revival of Asian economies. I don't see any reason why the same thing can't happen in Indonesia." (rei)