Thursday, February 26, 2009

Will Indonesia’s $4 Billion Bond Sales Plan Boost Government Spending?


Indonesia’s parliament approved a 73.3 trillion rupiah ($6.1 billion) stimulus package and endorsed the 2009 budget, paving the way for the country to sell as much as $4 billion of dollar-denominated debt.

The parliament endorsed a 2.8 percent increase in the government’s fiscal stimulus spending from an initial proposal of 71.3 trillion rupiah, Suharso Monoarfa, deputy chairman of the budget committee, said. That includes raising the budget to fund infrastructure programs by 13 percent to 17 trillion rupiah, he said.

The approval by parliament will enable the government to sell debt overseas to help fund a budget deficit of 139.5 trillion rupiah, or 2.5 percent of gross domestic product. The government plans to boost spending to sustain Indonesia’s economic growth, which is forecast to weaken to 4.5 percent this year from 6.1 percent in 2008.

The price for the dollar bonds “will be high because people will only let go of their foreign currencies with the assurance that they will get a high price,” Finance Minister Sri Mulyani Indrawati said. “A stimulus package is about timing, targets and is temporary.”

The government met investors starting on 2 February to drum up interest for the sale of dollar-denominated debt. The extra yield that investors demand to own ten-year Indonesian bonds instead of U.S. Treasuries has widened 1.8 percentage points this month to 10.8 points.

Fiscal Stimulus
The stimulus is effective starting on 1 March, Sri Mulyani said. The parliament also endorsed a government plan to raise 1.1 trillion rupiah in additional debt, Monoarfa said, without elaborating.

“We view the government moves positively,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas. “However, we remain concerned on the implementation and whether the government will be able to spend according to plan, considering that it did not manage well last year.”

Southeast Asia’s biggest economy posted a budget shortfall of 4.2 trillion rupiah or 0.1 percent of GDP last year, narrower than the 2.1 percent of GDP expected by the government after failing to spend as planned.

“We’re trying to soften the downward cycle, we’re trying to keep it from becoming too deep,” Sri Mulyani said.

The government may use 51.3 trillion rupiah unused from last year’s budget, sell 54.7 trillion rupiah of bonds and borrow 44.5 trillion rupiah to finance its shortfall, said Mandiri’s Damayanti.

Debt from Indonesia, which raised $4.2 billion from dollar-denominated bond sales last year, is rated BB-, three levels below investment grade, by Standard & Poor’s. Fitch Ratings ranked the proposed debt BB, or two levels below investment grade. The government had planned to sell the bonds in phases anytime in the next three years, according to S&P.

Considering Indonesia’s government spending last year, will the sale of dollar-denominated debt help address the country’s weakening economic growth?