Indonesia is pressing ahead with plans for a global bond, despite calls for it to address monetary policy before selling more debt.
Indonesia has shortlisted Barclays Capital, Credit Suisse, Deutsche Bank, Lehman Brothers and UBS as potential lead managers for a $1.5 billion sovereign bond. Bankers expect Indonesia to begin marketing the deal later this month.
After raising $2 billion of sovereign debt in January, the country is again selling dollar bonds to plug a budget deficit that is widening, as record oil prices force the government to spend more on its domestic fuel subsidies.
But investors are calling on the country to get its books in order before returning to the international capital markets.
“Indonesia needs hard currency, but it will need to sort out the subsidy issue and address monetary policy before bringing another dollar bond,” Joel Kim, head of Asian debt at ING Investment Management in Hong Kong, said. “It is already behind the curve and needs to hike rates to address inflation.”
Anggito Abimanyu, deputy finance minister, told Emerging Markets in Madrid that the cabinet would “in the next few days” discuss fuel price adjustments that would reduce the budget deficit from a projected $13.62 billion to $9.38 billion.
As well as raising domestic fuel prices, the government is planning to introduce a smart card system to ration consumption and target subsidies where they are most needed. “Clearly untargeted subsidies are not healthy fiscal policy,” he said.
Miranda Goeltom, senior deputy governor at Indonesia’s central bank, declined to answer questions on interest rate policy on the fringes of the ADB’s Madrid meeting – but acknowledged that the fuel subsidy had become a burden.
“We have seen pressure from these oil prices to the fiscal deficit, while we are benefiting from the high commodity prices,” she said. “We would have to look at how to balance this issue by removing the unnecessary spending on the fuel subsidy, and shift it to a much-needed action to address the huge rises in food prices.”
Indonesian debt has underperformed its peers in recent weeks after finance minister Sri Mulyani Indrawati warned on March 28 that the deficit could hit 2.1% of GDP in 2008, up from earlier estimates of 1.7%.
It now costs 200 basis points (bp) to protect Indonesian bonds against the risk of non-payment for five years. The country’s credit default swaps, which trade more regularly than cash bonds, are around 20bp more expensive than similar contracts for the Philippines.