Indonesia prepares to tap international debt markets

UBS and Barclays take Indonesia on a global roadshow ahead of a medium-term note programme and after Moody's reaffirms the Republic's credit rating.

UBS and Barclays Capital have been asked by Indonesia to arrange a $4 billion global medium-term note (GMTN) programme, and will lead the sovereign's roadshow across three continents during the next two weeks.

Although no immediate plans for a new issue have been announced, and no mandate has yet been given to any bank to lead manage a note offering, news of a forthcoming transaction can reasonably be anticipated.

The roadshow, which will include Ministry of Finance officials, travels to Europe and then the United States this week, and completes its tour next week in Asia. Finance minister Sri Mulyani Indrawati will visit "select locations" according to a banker familiar with details of the programme.

Last year, Indonesia raised $4.2 billion in two multi-tranche deals - one in January and the other in June. Barclays Capital, HSBC and Nomura/Lehman Brothers acted as joint bookrunners for the former, and Credit Suisse, Deutsche and Nomura/Lehman Brothers led the widely-praised June issue.

Indonesia's decision to set-up a GMTN programme obviates the time-consuming process of filing for individual deals and will give it flexibility to tap investor funds rapidly when windows of opportunity open in what is likely to be another tough year for debt capital markets. The sovereign will also be able to respond to reverse enquiries from institutional funds that might require small placements with specific tenors or duration.

On January 29, Moody's Investors Service said that it had assigned a foreign currency rating of Ba3 with a stable outlook to the forthcoming GMTN programme.

It cited the country's "moderate economic strength - which includes the economy's substantial size, diversity and increasing dynamism - and low, though improving, institutional strength", such as the government's anti-corruption efforts and improved tax administration. But the rating also "reflects the country's low per-capita income, and shortcomings in the rule of law".

According to Aninda Mitra, Moody's lead sovereign analyst for Indonesia, positives include the country's relatively moderate openness to global trade and the ability for domestic demand to drive GDP growth, which he predicts will be 4%-5% in 2009, compared with 6% in 2008.

But Mitra warns that despite maintaining a modest fiscal deficit of just 1% of GDP in the past four years, the government's overall financial strength is constrained by its reliance on external financing, which makes it vulnerable to the global credit crunch and to portfolio deleveraging, as well as exchange rate risks.

On the other hand, "financial risks from the unhedged foreign currency debt of the corporate sector or currency mismatches in the banking sector's assets and liabilities were low and the quality of supervision and enforcement of regulations had improved", he says.

"As a result, Indonesia's banking and corporate sector is facing the ongoing global financial volatility from a stronger position than at the time of the 1997 crisis."

Furthermore, a recently secured $5 billion standby loan arrangement with multilateral bodies, and the possibility of additional credit enhancement facilities, "could offset the downturn in commodity tax revenues, improve market access, and may even provide some room for limited counter-cyclical fiscal measures", says Mitra.

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