TheJakartaPost

Please Update your browser

Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.

Jakarta Post

OJK expects jobs law to spur municipal bonds issuance amid simplified bureaucracy

  • Riska Rahman and Arya Dipa

    The Jakarta Post

Jakarta/Bandung, West Java   /   Tue, December 8, 2020   /   01:48 pm
OJK expects jobs law to spur municipal bonds issuance amid simplified bureaucracy Rupiah bills (Shutterstock.com/Maciej Matlak)

The Financial Services Authority (OJK) expects the newly passed Job Creation Law to help spur the issuance of municipal bonds and sukuk among regional administrations, which have faced bureaucratic hurdles.

Luthfi Zain Fuady of OJK capital market supervision said on Dec. 1 that although several administrations had conveyed their interest in issuing a municipal bond or sukuk, the country’s capital market had yet to see any issuance.

“Jakarta, Aceh, West Java and Central Java administration, as well as the Banyuwangi district [in East Java] have expressed interest in issuing municipal bonds or sukuk,” he said during an Indonesia Stock Exchange (IDX) virtual media gathering.

“However, to date, no regional administration has issued municipal bonds or sukuk. There are quite a lot of challenges due to the bureaucratic procedures in the regions.”

Part of the reason is regional legislative councils (DPRD) that often disapprove the plan, Luthfi said.

However, the jobs law, which was ratified in October, removes the requirement for regional administrations to seek approval from the DPRD prior to issuing a municipal bond or sukuk, through a revision of an article in the Regional Administration Law. The revision also provides a legal basis for the regional administration to issue sukuk.

Luthfi said the jobs law provided “a breakthrough” for bureaucratic issues related to municipal bonds and sukuk issuance.

The COVID-19 outbreak, which continues to ravage the country, has limited the ability of regions to fund priority programs, according to the Finance Ministry’s fiscal balance director general, Astera Primanto Bhakti, in August. Regional administrations have seen revenue decline by around 28 percent on average amid the coronavirus pandemic, he added.

Read also: Indonesia allocates $684m to lend to regions to boost economy, step up spending

The government has allocated Rp 10 trillion (US$709.1 million) this year to provide loans for regional administrations, while taking measures to step up government spending, as it seeks to speed up the recovery of the economy.

Meanwhile, IDX companies assessment director I Gede Nyoman Yetna also confirmed that there has not been any listed municipal sukuk and bond issuance on the bourse yet. To further encourage regional administrations, he added that the IDX was offering a 50 percent discount on the listing fee for five years for every issued municipal bond or sukuk.

West Java Development Planning Board (Bappeda) head Taufiq Budi Santoso, however, said the West Java administration would not issue any municipal bonds next year, based on the latest decision made with the West Java’s DPRD.

“Generally the regional administrations proposing municipal bonds face difficulties in securing the DPRD’s approval,” Taufiq told The Jakarta Post on Dec. 1.

The municipal bonds issuance can potentially raise Rp 2.4 trillion to fund four projects in the province, he said. The projects range from the expansion of Al-Ihsan Hospital in Bandung, solar panels installation in 173 high schools and vocational high schools, construction of the interchange on the Cileunyi-Sumedang-Dawuan (Cisumdawu) toll road, as well as the development of the main access road to the Aerocity around Kertajati International Airport in Majalengka.

However, with the issuance of Job Creation Law, Taufiq said there was an opportunity to issue a municipal bond, although the implementation of the law should still be discussed with the Office of the Coordinating Economic Affairs Minister and the Home Ministry.

“God willing, we will discuss the implementation for regional administrations next week,” he said.

Regional Autonomy Watch (KPPOD) executive director Robert Endi Jaweng told the Post on Friday that he remained skeptical that Indonesia would see its first municipal bond issuance anytime soon despite the simplified requirement.

Although regional administrations are in dire need of more funds to help the fight the COVID-19 pandemic, he said many administrations were still lacking in budgetary discipline, which is essential in attracting investors to invest in their debt papers.

“They need to assure investors that they have the fiscal capability to repay investors and have good budgetary governance to show that they are credible and prudent in managing their budgets,” he explained.

Some administrations also often fail to present detailed and thorough planning for the projects that will be financed, said Robert.

To tackle these issues, he suggests that the government require regional administrations to have a medium-term budgetary plan in the government regulations derived from the Jobs Creation Law.

Meanwhile, RHB Sekuritas fixed income analyst Adra Wijasena said regional administrations needed to conduct studies to ensure demand for their municipal bonds or sukuk.

They should also continue to promote the debt paper to attract investors, while offering attractive returns to lure them, he said.

Adra also suggests the OJK issue a regulation that allows municipal bonds and sukuk to be regarded as government bonds for institutional investors like the pension funds.

“This could potentially attract investors who are reluctant to invest in the instrument or those who refrain from high-risk assets,” he said.