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March 4, 2009

Indonesia: Debt buyback could be a boost for bond market
Indonesia's rupiah bond buyback on Tuesday, its first since November 12, should support bond prices and help the government to finance a budget deficit that is forecast to reach 2.5 percent of GDP, Reuters quoted analysts as saying.

The buyback, results of which were likely to be announced at around 0730 GMT, to help add liquidity in the financial system after the central bank sold dollars to help prop up the ailing rupiah.

The government -- which has already raised two-thirds of its gross debt issuance target this year -- may also be using the buyback to send a message to the market that it was confident of raising funds to finance its budget deficit for 2009.

The finance ministry plans to buy back bonds consisting of zero coupon bonds due September 20, fixed-rate bonds due June 15, floating-rate bonds maturing on July 25, and retail bonds maturing on August 9.

"It could possibly (be) to return some rupiah liquidity back into the market," said Edward Lee, regional head of fixed income strategy Asia.

"There has been some selling recently (of government bonds) and that may have prompted them to do something to support the market."

The finance ministry usually carries out debt buybacks a few times a year, in order to boost sentiment in the bond market and improve its maturity risk profile.

Handy Yunianto, debt analyst at Mandiri Sekuritas, said investors were likely to keep their fixed-rate bonds and were more likely to sell the floating-rate debt, due to expectations of falling interest rates.

The debt buyback followed recent higher-than-expected, albeit costly, debt-raising in both the domestic and global market by the finance ministry.

"The government has already raised around 62 trillion rupiah ($5.17 billion) so far, so it's around 62 percent of its target. The funds may be used to finance the buyback," Yunianto said.

Foreign investors had reduced their holdings of high-yielding but high-risk Indonesian bonds, as in other emerging economies, amid the global financial crisis, putting pressure on the domestic bond market.

Domestic demand, however, has improved amid expectations of further interest rate cuts BIPG, with strong demand for both conventional bonds and Islamic-compliant debt in recent auctions.

"The government has seen there are flows coming," said Wiling Bolung, head of trading at ANZ Bank.

"The bond market has been deteriorating in the last couple of weeks. There are two reasons they may be doing this -- balancing the market by providing some demand and stocking up their portfolio for the repo monetary operations."

A 73.3 trillion rupiah ($6.12 billion) fiscal stimulus package passed by parliament last month includes infrastructure spending, aimed at creating jobs and spurring growth that is set to slow to 4-5 percent in 2009, from 6.1 percent in 2008.

The package has pushed the budget deficit to 2.5 percent of GDP this year, and will be partly financed by debt. Last week, Indonesia sold $3 billion of global bonds, and has $5-6 billion of standby loans.

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