Thursday 28 Mar 2024
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(Sept 12): Indonesia’s biggest province is selling bonds to fund an airport, kickstarting a municipal debt market that may help spur economic growth from a five-year low.

The debut offer by West Java, which has a population the same as Spain’s and stretches from the commuter suburbs abutting Jakarta to the volcanoes surrounding its capital Bandung, will sell 4 trillion rupiah ($338 million) of notes as soon as October, Governor Ahmad Heryawan said in a Sept. 4 interview. PT Mandiri Sekuritas, the country’s largest underwriter, and PT Manulife Aset Manajemen Indonesia said some of Indonesia’s 33 other provinces may follow suit.

The first debt sales by Indonesian regions would help President-elect Joko Widodo make good on his promises to prioritize development of roads and ports and lift annual gross domestic product expansion to 7 percent. Economic growth in Indonesia, whose infrastructure quality was ranked the lowest among global emerging markets by the World Economic Forum last year, slowed to 5.12 percent in the second quarter.

“If investors can get an attractive yield from the sale and West Java can receive strong demand, then it will be a trigger for other provinces to follow,” Handy Yunianto, head of fixed-income research at Mandiri Sekuritas, said in a Sept. 9 interview in Jakarta. “An active municipal bond market will mean better infrastructure building and more accountable provincial governments.”

Approval Pending

Indonesia’s 10-year sovereign bonds yielded 8.19 percent, according to the Inter Dealer Market Association, compared with 3.99 percent for similar-maturity Malaysian notes and 4.40 percent for debt from the Philippines. In the U.S., municipal securities yield an average of 118 basis points, or 1.18 percentage points, more than Treasuries, according to a Bank of America Merrill Lynch index.

East Java province and metropolitan Jakarta considered selling municipal debt as early as 2008 to fund local projects, although neither plan materialized. The Financial Services Authority encourages regional governments to raise their own funds, although no bond sales have happened because of a lack of awareness and expertise, Nurhaida, Jakarta-based executive head of capital market supervision at the regulator, who like many Indonesians has only one name, said in February.

West Java, with a population of 46 million, still has to get approval for the sale that has yet to be assessed by a credit-rating company from the authority and the finance ministry. The regional government will guarantee the debt, Governor Heryawan said last week.

Improve Creditworthiness

Funding requirements for major capital projects has prompted several other Indonesian provinces to express an interest in selling municipal bonds, Rabin Hattari, a public sector economist at the Asian Development Bank in Jakarta, said in a Sept. 10 interview.

“In practice, however, the process is not an easy task,” as the issuance must be approved by the finance ministry and the Financial Services Authority, he said. “To have a positive impact on economic development, the government needs to see municipal bonds as a way to improve the creditworthiness of local governments.”

Among the major Southeast Asian economies, the Philippines and Vietnam already have municipal bond markets, while Thailand’s Securities and Exchange Commission said in July that it would issue rules to allow such offers. There have been no local-government sales in Malaysia.

Chinese Example

In the Philippines, the Local Government Unit Guarantee Corporation has backed 17 municipal sales with a combined value of 3.2 billion pesos ($73 million), according to a statement posted on its website. Vietnam has 8.72 trillion dong ($411 million) of outstanding bonds from Hanoi, Ho Chi Minh and Da Nang, data compiled by Bloomberg show.

China’s State Council let local authorities sell debt directly to raise funds for projects of public interest under approved quotas, according to an Aug. 31 statement by the standing committee of the National People’s Congress in Beijing. That followed exceptions given to Shanghai and Shenzhen as well as Zhejiang and Guangdong provinces to sell municipal bonds on a trial basis in 2011.

“What’s happening in China can prove instructive for Indonesia,” Christian de Guzman, a senior sovereign analyst at Moody’s Investors Service in Singapore, said in an interview yesterday. “One of the things that has to happen first is the legal and regulatory framework. For example in China, the government amended the law after pilot programs where they ensured that everything went smoothly.”

‘Progressive Step’

Indonesia’s finance ministry limits provincial governments’ total accumulated liabilities to 75 percent of the previous year’s revenue and requires them to have income of at least 2.5 times their debt, the ADB’s Hattari said. The municipalities’ total fiscal deficit may not exceed a limit set by the ministry, he said.

The nation’s local-currency sovereign bonds have led gains in Southeast Asia this year, returning 8.4 percent, according to Bloomberg indexes. That compares with a 5.2 percent advance for Thai debt, a 3.6 percent gain for Malaysian notes and a 2.9 percent increase for securities from the Philippines.

“West Java’s bond issuance is a progressive step,” Nagaraj Kulkarni, a senior rates strategist at Standard Chartered Plc in Singapore, said in a Sept. 10 interview. “Such bonds provide issuers with market-linked financing, and local investors with portfolio diversification opportunities.”

‘Closely Watched’

Overseas investors have pumped 118 trillion rupiah into Indonesian local-currency government debt this year, finance ministry data show. Inflation slowed to 3.99 percent last month from 8.22 percent in January, and the rupiah has rallied 2.9 percent against the dollar in 2014, leading gains in Asia, following a 21 percent plunge last year.

Manulife Aset, the local fund management unit of Manulife Financial Corp., Canada’s largest insurer, would consider buying West Java’s bonds provided the province offers extra yield to account for the difficulty to trade the debt, Ezra Nazula, head of fixed income in Jakarta, said in a Sept. 10 interview.

“This is a pilot project that will be closely watched by other municipalities with funding needs,” he said. “If it goes well, then we can see it kickstart a new market and provide a new investment option for us.”
 

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