Indonesia Urged to Focus on Local Bonds

Jakarta Globe, Faisal Maliki Baskoro & Bloomberg, May 02, 2010

With the crisis in Europe roiling global markets, analysts believe the government should postpone inter national bond issues to cover the budget deficit and instead raise funds in the strong domestic capital markets.

“It is in the best interest for the government to delay sales until global economic conditions become normal again,” Purbaya Yudhi Sadewa, chief economist at state-run Danareksa Research Institute, told the Jakarta Globe on Sunday.

On Friday, Bloomberg reported that the government had delayed a planned sale of 100 billion yen ($1.1 billion) of Samurai bonds scheduled for June, according people familiar with the matter. The sources said a meeting with potential investors set for this month had also been postponed.

Purbaya said Greece’s debt disaster likely prompted the delay. Under such conditions, issuers in emerging nations such as Indonesia could be forced to offer higher yields, making it more expensive to access funding overseas.

“That would cause the government to pay more” for financing, he said.

With the nation still experiencing a surge in capital inflows, there is perfect momentum to issue domestic bonds, he said.

Foreign inflows have helped make Indonesia’s currency, stocks and bonds Asia’s best performers in the past 12 months.

Helmi Arman, an economist at PT Bank Danamon, said that judging from the current domestic market performance, issuing local bonds was more favorable than selling debt overseas. But he stressed that a Samurai bond sale would still be needed this year “to provide diversification of financing sources.”

Indonesia has been selling debt overseas to help cover its 2010 budget deficit, forecast at 2.1 percent of gross domestic product, or Rp 129.8 trillion ($14.4 billion). Through February, the government has met 24.5 percent of its bond issuance target of Rp 233.6 trillion on the back of strong foreign demand for the nation’s high-yielding assets.

Foreign holdings of Indonesian bonds have risen 38 percent this year to Rp 148.5 trillion, according to Finance Ministry data.

In February, the government canceled plans for the country’s first sale of euro debt because there was little appetite from investors amid Europe’s debt problems.

Over the weekend, the government of Greece agreed to a 120 billion euro ($160 billion) bailout package from the European Union and the International Monetary Fund to rescue the nation from its soaring public debt.