Indonesia's tax amnesty could give corporate bond market a boost

August 5, 2016 4:49 AM EDT

A view of the buildings in Central Jakarta, Indonesia August 2, 2016. Picture taken August 2, 2016. REUTERS/Darren Whiteside

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By Fransiska Nangoy

JAKARTA (Reuters) - Indonesian firms are preparing to hit the debt markets with the repatriation of offshore wealth from the country's new tax amnesty expected to boost investor demand for products such as corporate bonds, lowering companies' borrowing costs.

Companies including construction firms PT Adhi Karya Tbk and PT Waskita Karya Tbk are planning to issue bonds to capture a slice of the billions of dollars the government expects to bring home by March 2017.

"With the tax amnesty and repatriated funds, of course the liquidity will improve. If liquidity improves, the coupon rate will be lower," said M Choliq, president director of Waskita.

Waskita is eyeing a coupon rate of around 8.5 percent for its planned bond issue of up to 20 trillion rupiah ($1.52 billion), cheaper than the 9.25 percent rate it set for the previous issuance for 2 trillion rupiah last month, Choliq said.

PT Pelabuhan Indonesia III, a port operator that secured a 4.5 trillion rupiah syndicated loan this month, is planning to sell 5 trillion rupiah bonds early next year, the company's president director Orias Petrus Moedak told reporters.

Meanwhile, Adhi Karya, another construction firm, plans to ramp up its bonds issuance before the March deadline for the tax amnesty to take advantage of the surge in investment interest, corporate secretary Ki Syahgolang Permata said.

The government last month started the program, which offers lower tax rates for Indonesians who declare and repatriate untaxed assets. The repatriated assets will have a lock-up period of three years and can be invested in instruments allowed by the government, which include corporate bonds, local stocks, and property.

"The tax amnesty aside, this is good timing for corporations to sell bonds," said Boumediene Sihombing, an investment banker with Danareksa in Jakarta.

He said historically low inflation rates allow some headway for further central bank interest rate cuts while market confidence, improving economic growth and government spending are creating a conducive environment for companies.

Around 35.3 trillion rupiah ($2.69 billion) has been raised in Indonesia's corporate bond market by 15 companies in the year to June 3, according to data from Financial Service Authority (OJK). That compares with 23.4 trillion raised in the same period last year.

Amid declining interest rates, corporate bonds are seen offering compelling returns in the debt market, said Wahyu Trenggono, director at Indonesia Bond Pricing Agency.

"Although interest rates are not as high as they were at the beginning of the year, corporate bonds are still offering decent returns at a premium to government bonds," Trenggono said.

The yield of the benchmark 10-year Indonesian government bond has gone down to 6.90 percent following the implementation of the tax amnesty. This is down from around 7.7 percent before the passage of the bill late in June.

The expected new supply of corporate bonds could also help Indonesia increase liquidity in the secondary corporate bond market, where the average daily trading volume is less than 1 trillion rupiah, according to Trenggono. That compares with an average daily volume of 10-14 trillion rupiah in the government bond market.

Existing investors usually buy bonds and hold them to maturity.

While the tax amnesty could help invigorate key parts of Indonesia's markets and finances, its full implementation could face some hurdles. The amnesty was recently brought to Indonesia's Constitutional Court for a judicial review by legal activists who argue it protect money launderers and tax evaders.

The court has given the activists until Aug 9 to submit a revised request.

($1 = 13,125.0000 rupiah)

(Additional reporting by Cindy Silviana; Editing by Sam Holmes)

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