Govt moves ahead with 'bonds-for-cash' swaps

Urip Hudiono, The Jakarta Post, Jakarta

Oil-rich regions will be able to choose from a variety of bonds that the central government will offer them in exchange for up to Rp 13.9 trillion (US$1.5 billion) out of the windfall revenues that accrue to them as their share of national oil and gas revenue next year.

The "cash-for-bonds" deal is part of the central government's efforts to mitigate the consequences of a worst-case scenario under which oil prices average $100 a barrel throughout the whole of next year, which could push up budgetary spending by Rp 54.7 trillion.

This figure includes more payouts from national oil and gas revenues to the producing regions -- like Riau and East Kalimantan -- apart altogether from additional subsidy spending on oil-based fuels.

"We will offer the bonds according to each region's specific cash-flow needs," the Finance Ministry's director general for debt management, Rahmat Waluyanto, said Wednesday.

"They could be short-term bills or long-term bonds, tradeable or non-tradeable ones."

The ministry might particularly suggest that the regions take up bonds from the secondary market, Rahmat said, should they prefer bonds, which are more easily tradeable.

"The plan is that the regions will purchase the bonds through private placements based on market-pricing mechanisms," he said.

On Tuesday, Finance Minister Sri Mulyani Indrawati said the government had prepared a package of measures for next year aimed at saving up to Rp 54.7 trillion to help it anticipate a worst-case scenario resulting from high oil prices.

The bonds-for-cash program for oil-producing regions is one of those measures.

On possible objections from the regions, Rahmat said that his officials would work with the ministry's Regional Financial Balance Office to inform the regions and negotiate with them.

"How much money will be exchanged for bonds will depend on the negotiations, while still adhering to the usual revenue-sharing formula," he said.

"Many regions let their funds sit idle, anyway, parking them in short-term investment instruments, like central bank bills, before putting to use."

Under the plan, the regions would still obtain such advantages as capital gains based on the option of tradable bonds, and more predictable interest earnings if they choose longer-term bonds.

The swap plan is expected to slightly increase the government's net bond sales next year.

The government plans to raise Rp 91.6 trillion in net bond sales to finance the 2008 budget, up from Rp 58.5 trillion under this year's revised budget.

Under the worst-case scenario, oil-and-gas related revenue payouts to the regions next year may come to Rp 41.2 trillion, compared to the expected Rp 23.6 trillion.

Overall, while the government's action plan is almost enough to cover the Rp 54.7 trillion in additional oil-related spending, the additional revenues only come to Rp 52.8 trillion, pushing next year's deficit up slightly to Rp 75.9 trillion, or 1.8 percent of GDP.