T

he government has decided to withdraw a plan to issue the Japanese yen-denominated '€œSamurai'€ bonds this year as it seeks to reduce exposure to foreign debt following increased currency risk on the back of a consistently weak rupiah.

Deputy Finance Minister Bambang Brodjonegoro said late on Wednesday that the current amount of foreign currency bonds, as well as the ones the government was preparing, might already be sufficient to finance the budget deficit.

'€œWe want to focus on what'€™s really needed, given the already high foreign ownership in our bonds,'€ he said when asked the reason behind the cancellation of the Samurai bonds issue.

The government already has many financial instruments on hand to plug the budget deficit, from dollar bonds, global sukuk (financial certificates), eurobonds and onshore dollar bonds, in addition to domestic financial instruments such as conventional rupiah bonds, retail rupiah bonds and retail sukuk, Bambang explained.

'€œIdeally, the issue of foreign currency bonds should be pushed down as low as possible to safeguard against risk from [currency] volatility,'€ said Bambang.

Indonesia has issued Samurai bonds three times since they debuted in 2009. The latest offering in 2012 was considered a great success, as the government reaped ¥60 billion (at that time around US$750 million) from selling yen-denominated notes maturing in 10 years, with coupon yields only standing at 1.13 percent.

At that time, the yield was 30 basis points over yen swaps, which was cheaper compared to other foreign currency bonds. For comparison, the government'€™s latest eurobonds sold earlier this month had a yield of 2.97 percent, or 195 basis points above the euro mid-swap rate.

The strategy to issue Samurai bonds, which had initially been planned in the second semester this year, could be pushed back to the first semester of 2015, instead of this year, according to Finance Ministry debt management office head Robert Pakpahan.

He said that the government was studying the possibility of issuing Samurai bonds without a guarantee from the Japan Bank for International Cooperation (JBIC), which since 2009 has guaranteed the risk for Japanese investors investing in Indonesia'€™s yen-denominated bonds.

'€œWithout the guarantee, investor risks may be higher, which in turn will lead to higher yields for our Samurai bonds,'€ said Robert.

'€œBut, we want to test the market'€™s appetite without the guarantee, because we could not continuously rely on [JBIC'€™s] guarantee forever.'€

Foreign currency bonds issued by the Finance Ministry, notably the government'€™s dollar and euro debt papers, have been the most sought-after assets among fixed-income investors overseas.

On July 3, Bloomberg reported that the yield for the government'€™s 10-year dollar bonds, issued in January, had dropped 1.45 percentage points, indicating more expensive pricing among investors.

Indonesia'€™s greenback notes have returned by more than 10 percent this year, the second-best performer among 12 Asian emerging market indexes compiled by HSBC Holdings Plc.

The high returns that Indonesia'€™s foreign currency bonds offered in the secondary market caused the government'€™s latest eurobonds offering to be almost seven times oversubscribed, with incoming bids topping ¤6.7 billion (US$9 billion), compared to its target issuance of ¤1 billion.

I Made Adi Saputra, a fixed-income analyst with BNI Securities, said that it was unfortunate that the Finance Ministry stepped back from the initial plan to issue Samurai bonds this year as the Japanese market was currently awash with liquidity due to its central bank'€™s monetary stimulus that might drive down the government'€™s borrowing costs.

'€œBut, it'€™s worth noting that relying too much on overseas for funding also poses risks on the currency side, especially at times like these when the rupiah is now showing a trend to depreciate, not to appreciate,'€ he said.