Indonesia: bring on the bonds

Indonesia continues to gear up for its second dollar bond this year.

Terrorist bombings and protests about fuel hikes aside, the Indonesian government continues to try to put a positive spin on its proposed global bond issue. Citigroup, Credit Suisse First Boston and Merrill Lynch are joint bookrunners of the $1 billion offering, which has the same10-year structure as the government's earlier deal this April.

"With all preparations for the offering already intact, the government hopes to launch the global bond offering any time soon after the global capital market conditions are deemed favourable," said Minister of Finance Jusuf Anwar at a press conference at the Presidential Palace after returning from a New York and London roadshow last week. "After the recent roadshow in which we received a very positive response from investors, we will go directly to the market as several key investors have already conveyed their interest."

The bond deal is largely dependent upon the nation's fiscal condition, which is currently fuelled by fuel. Privately, businessmen say the government should take a wait-and-see attitude until it becomes clear how the currency withstands the increase of the price of petrol at the pumps. The government announced the new prices on Saturday.

Kerosene, which is widely used by the poor for cooking, went up to 2,000 rupiah (19.4 cents), an increase of 186%. To help ease the impact, the government has said it will hand out a short-term subsidy of Rp300,000 to more than 15 million poor households. It will also offer incentives for industry, as the government knows higher fuel prices will lead to inflation, which will lead to lay-offs.

The price for premium petrol was raised 88% from Rp2,400 to Rp4,500, while diesel oil rose 104% from Rp2,100 to Rp4,300.

But analysts say the nation seems to be taking these new costs in uncharacteristic stride, despite the fact the widely anticipated increase for all fuels was a 50% spike. This may bode well for the government's proposed bond issue.

"Yields have stabilized in the past two weeks as the pace of selling in government bonds to fund redemptions has eased," says Michael Chambers, head of TIPs research at CLSA. "The outlook for yields depends on the government's success in reducing pressure over fuel prices. A well received move should open the way to lower bond yields, even as inflation and short-term rates may need to increase.

"Prices of corporate bonds have also increased," he adds, "primarily as corporates move to repurchase bonds now trading at very high yields."

Last month's selling pressure pushed out Indonesia's dollar-denominated April 2015 deal to a record high yield of 7.69% in late August, but it has tightened some 35bp over the last few weeks. The deal is currently yielding around the 7.35% range. Market specialists expect any new 10-year Indonesia deal to offer a 30bp to 40bp premium over the 2015's.

Early last week the House of Representatives also agreed to raise fuel prices by capping the fuel subsidy at Rp82.9 trillion this year, from an estimate of more than Rp.120 trillion had the government stayed the course with its original fuel pricing. Most business people agree the fuel subsidy must be reduced.

Concerns over the fuel subsidy, also prompted Standard & Poor's to lower its outlook on the country's B+ rating from positive to stable at the beginning of September.

In response to both this rating and the fuel-price rise, Bank Indonesia, the central bank, is indicating it will again have to raise interest rates to help stem inflation and keep the rupiah attractive. Annual inflation reached a five-month high of 8.3% in August - that was only outdone by the 8.81% high in March, when the government last hiked the price of fuel.

But the central bank has been gently pushing interest rates up - it raised rates twice last month, from 8.75% to 9.5% and then again to 10% - in an effort to stabilise the rupiah when it slumped against the US dollar. As a result, the rupiah has steadied to around Rp10,200 to the greenback.

Past fuel increases have caused considerable problems for Indonesia. In early May 1998, riots in Jakarta left an estimated 1,200 people dead after President Soeharto hiked fuel prices by up to 71% following pressure from the International Monetary Fund to cut subsidies. A few weeks later, Soeharto quit.

Protests have followed every price hike since and even caused President Megawati Sukarnoputri to partially roll back increases she imposed in January 2003. But current President, Susilo Bambang Yudhoyono, has been preparing the public for his new prices, telling citizens at rallies around the country that protests are fine, but offering up alternative solutions should be part of the process.

Outside of Indonesia, headlines have focused on some of the violent protests that have already erupted. Within Indonesia, the news appears to have been more even-keeled. For example, on Friday, a story about the handful of pre price-hike demonstrations that turned violent was reported on page four of the Jakarta Post - opposite a page five story about elephants attacking Aceh fruit plantations.

The larger socio-political problem for the nation, which will certainly impact a tourism-destination's economy, is the coordinated bomb attacks on crowded restaurants in the heart of Indonesia's resort island of Bali on Saturday. The attack killed 25 people and wounded 102. It was nearly three years after militants linked to al Qaeda bombed two nightclubs in Bali, killing 202 people, most of them foreign tourists. Saturday's bombings may well turn the nation's attention away from fuel and back to religious differences.

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