While some Indonesians rushed to purchase recently released government bonds, officials are welcoming the growing confidence in the country's fiscal and monetary policies.
During an auction on August 7, the government sold Rp3.28 trillion ($361m) in treasury bonds to individual investors. The bonds have a fixed coupon rate of 12.05% per annum and have a face value of Rp1m ($109.86) each, with a minimum order of five. Interest will be paid on a monthly basis, with the bonds expiring on August 9, 2009.
Originally scheduled to raise Rp2 trillion ($219.71m), the government decided to meet demand and increased the amount of bonds issued. Earlier, the government indicated a Rp50m ($5492.37) cap for individual orders, but in order to attract more demand this was cancelled, driving up orders to 17,403 and the average order size to Rp262m ($28,779.61).
On August, Mulia P. Nasution, the treasury director general of the Finance Ministry, revealed to journalists that demand came mainly from private sector employees, followed by housewives and entrepreneurs. The buyers came principally from Jakarta, followed by West Java, East Java and North Sumatra.
The government is using the sale to individual investors to expand its sources of financing the state budget deficit. Since 2002, the government has regularly issued bonds to institutional investors.
Although the August 7 issuing of retail bonds is relatively small compared to the expected total of Rp35.8 trillion ($3.93bn) to be raised by all treasury bonds sales this year, the warm reception is widely seen as an indication of growing trust in Indonesia's fiscal situation.
Analysts attribute this positive sentiment largely to increasingly prudent policies amid difficult domestic and global conditions.
As the only net-importer of oil among OPEC member nations, Indonesia was badly affected by the rally in global oil prices in 2005. The politically sensitive system of fuel subsidies threatened to put increased pressure on the state budget, with a large deficit looming.
In November 2005, the new government, after much too and fro, decided to substantially lower subsidies on fuel, which resulted in an average price hike of 126.6%.
Indeed, the move, combined with low government spending, decreased pressure on the state budget. However, some analysts blame the high inflation experienced by the country at the end of 2005, up to 17.11% for the whole year, on the government's decision to slash fuel subsidies.
As a result of the inflationary increase, people's purchasing power, in the largely consumer-driven economy of Indonesia, dropped. Also, government spending has again been lower than expected due to fears among officials of graft allegations.
The government's slow implementation of reform packages that aim to improve the investment climate are delaying the arrival of much needed foreign direct investment (FDI). External factors like US inflation and interest rate policy have further restricted economic growth.
Even though exports rose in the first half of 2006 by 15.14% compared to the same period in 2005, economic growth has been hampered in 2006 thus far.
Amid these difficult circumstances, complicated further by several natural disasters, prudent monetary and fiscal policies by the government and central bank have provided macro-economic stability and prevented Indonesia from falling into another crisis.
In its public information note of July 31, on the fifth post-programme monitoring discussion with Indonesia, the Executive Board of the IMF "welcomed the government's efforts to avoid the spending shortfalls that had occurred in 2005 by simplifying procurement and budget execution procedures".
After inflation cropped up, the central bank raised its key interest rate to 12.75%, only to ease rates in May when inflation seemed to stabilise. While this has pushed demand down, it has also allowed the central bank to substantially build up its foreign reserves.
According to figures from the central bank, foreign exchange reserves stood at $41.1bn at the end of July. Indonesia has announced that it wants to use its reserves to decrease foreign debt, including expedited repayment of its debt to the IMF, which originally was scheduled for December 2010.
Total foreign debt for Indonesia in 2006 stands $136.9bn, or 39% of GDP, compared to 47.6% in 2004, according to projections by the IMF.
The loans from the IMF, which were granted to assist Indonesia in dealing with the financial crisis in the late 1990s, are now scheduled to be fully repaid before the end of this year, provided that foreign exchange reserves permit this. Of the remaining $7.8bn, Indonesia repaid half in June.
While warmly welcomed, especially domestically, some analysts have advised against early repayment. They argue that Indonesia's reserve ratio against external debt is still relatively low when compared to other countries in the region, with the exception of the Philippines. Given the importance of a good ratio in boosting investor confidence so the country can withstand external volatilities and short-term liquidity mismatches, analysts argue for further reserve accumulation.
Despite the relatively low reserves-to-external debt ratio, analysts believe government insolvency becomes less likely, decreasing the credit risk of the bonds. In the meantime, retail investors can enjoy the benefits of their newly acquired government bonds.
On August 8, one day after the bonds were issued, the central bank lowered its key interest rate by 50 basis points to 11.75%, and further cuts leading to single digits are expected before the end of the year.
With the bonds tradable on the Surabaya Stock Exchange, investors with liquidity needs have the possibility to quickly cash in on this favourable climate.