Tax breaks urged for treasury bond trade

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)