Urip Hudiono, The Jakarta Post, Jakarta
The government will turn to the offshore bond market as part of changes to treasury management following the winding up of the Consultative Group on Indonesia (CGI), a forum made up of Indonesia's major creditors, a senior official says.
Speaking to reporters Friday in Jakarta, the Finance Ministry's director general for debt management, Rahmat Waluyanto, said that the government would issue more securities to cover the cost of foreign loan principal repayments, and to help finance the budget deficit, rather than taking on new foreign loans.
Finance Minister Sri Mulyani Indrawati had said that tapping the bond market would be much more favorable than taking out further foreign loans from the exchange rate, maturity and interest rate perspectives. In addition, it would help to bolster the country's political independence.
Indonesia's total sovereign bond debt currently stands at $82.3 billion, or 57.3 percent of the country's total sovereign debt -- a slight reversal of Indonesia's debt profile in 2000, when 53 percent of the debt consisted of bonds and 47 percent of foreign loans.
""In addition, our strategy in managing the nation's debt will include paying back commercial loans ahead of schedule. In particular, we will try to reduce the amount of commercial loans,"" Mulyani said.
""We will also negotiate more debt-swap agreements for nature, for education, and so forth, although this (the amount of debt reduction) will actually be small, overall.""
However, Rahmat said that a reduction in commercial loans might not be possible in the near future as most of these loans were still needed to finance export credits for the procurement of military equipment.
""That is why the Finance Ministry recently issued a regulation encouraging domestic firms to become involved in the arms industry, with the financing coming from local banks,"" he said.
However, figures from the Finance Ministry show that Indonesia's commercial loans as of 2006 amounted to only US$2.12 billion, or 1.5 percent of the country's total outstanding debt stock of US$143.6 billion. Some of Indonesia's bilateral loans, worth a total of $40.98 billion, are, however, semi-commercial.
Commercial loans normally carry more stringent terms and higher interest rates, thus making them more costly than the average government bond yield of some 10 percent at present, Rahmat said.
Meanwhile, most of the country's multilateral loans, worth $18.24 billion, are semi-concessional, and bring Indonesia's total foreign loans to $61.33 billion, or 42.7 percent of the country's total debt, with $10.8 billion being undisbursed to date.
While concessional loans are denominated in foreign currency, they have maturities of up to 30 years, plus grace periods, and low interest rates of between 3 and 5 percent.
The government this week decided to terminate the CGI, which pledged $5.4 billion in new loans and grants to Indonesia last year. The decision was, according to the government, based on practical and political grounds, and the fact that Indonesia can now employ bonds as financing instruments. The government will, however, continue to work closely with its major creditors from the CGI -- Japan, the Asian Development Bank and the World Bank -- on a bilateral basis with a view to securing concessional loans for social development programs and loans for specific projects.
The government is hoping to raise Rp 40.6 trillion in net bond proceeds this year to help plug the budget deficit.
Among these will be two treasury bill offerings, three retail bond offerings, and Islamic bond offerings after the necessary regulations have been issued, Rahmat said.
The government will take out Rp 40.2 trillion in foreign loans this year, and repay Rp 54.8 trillion in debt principal.
Concerning the early repayment of foreign loans, Director for Debt Evaluation and Settlements Widjanarko said the government would look into the available options.
However, he said that many creditor countries would be reluctant to accept accelerated repayment as they had sourced the loans from the market, which required them to take into account their own maturities and interest-rate paybacks.
""One time when we made early repayment, they imposed a 1 percent penalty on the debt principal,"" he said.
