Jakarta plans to sell Indonesia’s first local bonds

JAKARTA, Apr 20: Jakarta aims to issue Indonesia’s first ever municipal bonds this year to take advantage of the country’s new investment grade status to fund infrastructure, a Finance Ministry official said on Friday.
The planned first issue would be small at 1.7 trillion rupiah ($185 million), but if successful it could pave the way for other regional and local governments to raise money from international and domestic investors to overhaul the dilapidated roads, ports and airports that are obstacles to long-term growth in Southeast Asia’s largest economy.
Industrial province West Java, coal-rich East Kalimantan, port cities Surabaya and Makassar and tourist centre Yogyakarta are also considering issuing municipal bonds to finance public projects, though these plans are at an early stage, said Marwanto Harjowiryono, director-general in charge of regional funds at the ministry.
‘Everyone is hoping for a success story from this first municipal bond … We are really hopeful for Jakarta,’ Harjowiryono told Reuters in an interview.
‘If this one succeeds, hopefully the next ones will succeed because they will give regions the chance to improve their source of financing,’ said Harjowiryono, a former director at the Asian Development Bank.
Indonesia sold $2.5 billion in U.S. Dollar bonds this week with yields at record lows, as it drew strong global investor demand in the first such issue since the G-20 economy won a second investment grade rating from Moody’s in January.
Investors said Indonesia should issue more bonds, given bidding of $7.9 billion for the global bonds, though some recent auctions for local rupiah-denominated debt have failed to meet expectations given worries over the currency and inflation.
The proceeds from Jakarta bonds would be used to develop a hospital, public housing, a bus terminal and improved sanitation in the sprawling capital of 10 million, helping take budget pressure off the central government.
Harjowiryono, who has a master’s degree from Vanderbilt University in Tennessee, said local and foreign financial institutions such as the World Bank had expressed interest to buy the Jakarta bonds.
According to the Finance Ministry, around 60 percent of annual state spending is allocated for regional development in the archipelago’s decentralised political system. This amounts to roughly 950 trillion rupiah this year, but only 20 percent of the money is allocated for capital spending.
Economists have repeatedly said Indonesia should spend more for infrastructure to achieve the growth potential of above 7 percent a year targeted by President Susilo Bambang Yudhoyono.
U.S., Mexican and Australian states are regular issuers of municipal bonds, but outside Japan few other Asian countries look to debt markets for local government funding. The Chinese Ministry of Finance has been issuing bonds on behalf of local governments, and last year selected four trial cities to start issuing bonds on their own.
Indonesia’s central government will not guarantee bonds issued by regions. The Finance ministry expects regions to be fiscally prudent before issuing any bonds and said they should draft dedicated regulations to guarantee the debt.
‘We must protect, so when regions issue municipal bonds, they won’t be harmed. We also want investors’ trust…That there’s a certainty their money will return,’ said Harjowiryono.
Existing regulations say that each region can only borrow a maximum 75 percent of its total income so it will be able to pay off debt. Its debt-service coverage ratio – the amount of cash flow available to meet annual interests and principal payments on debt – is also set at a minimum 2.5 percent.
Indonesia’s prudent fiscal policies led ratings agencies Fitch and Moody’s ratings to restore its investment status in December and January. Standard & Poor’s, which had a team in Indonesia last month, is widely expected to do likewise soon.
However, concerns over a higher central budget deficit and inflation, should there be a fuel price hike sometime this year, have led investors to take profits on local assets in recent weeks, with the 10-year government bond yield trading at 5.9 percent on Thursday from a record low 5 percent in February.
If inflation expectations intensify, investors will ask for higher yields when Jakarta issues its municipal bonds. Jakarta’s inflation in March was at 4.13 percent year-on-year, higher than the country’s 3.97 percent, data from the statistics bureau shows.
‘We cannot separate the (local) economy from the health of the national economy… We expect Indonesia’s economy to improve, which means the organs in Indonesia – not only regional governments but also corporates – can be trusted more so the price that they have to pay, interest or yields, will be lower,’ said Harjowiryono. (agencies)