Hot spots: Indonesia.(foreign exchange markets )

The risk premium on Indonesian foreign debt instruments has been declining ever since the government of President Susilo Bambang Yudhoyono responded to the mini-crisis in the foreign exchange markets last year with an aggressive tightening of the monetary and credit reins, and with a steep hike in energy prices (by slashing subsidies) in order to whip the fiscal accounts into better shape. Recently, Indonesia was, thus, able to raise USD 2 billion in its biggest overseas debt sale to date, offering yields that were nearly a full percentage point (94 basis points, to be exact) lower than what it cost the administration last October to sell IOUs of similar maturity.

Indonesia sold USD 1 billion of new bonds maturing in 2017 with a coupon of 6.875 percent. This debt yields 235 basis points more than comparable U.S. Treasuries. By comparison, back in October the government had to offer a risk premium of 329 basis points on USD 900 million in 10-year notes. The administration a few weeks ago also sold USD 1 billion of 8.5 percent debt due in 2035, pricing the securities at 264 basis points above U.S. Treasuries. Last October, when it sold USD 600 million of 30-year bonds, it had to pay a spread of 406 basis points.

Clearly, the confidence of investors in Djakarta's course has strengthened, encouraged, as it was, by the praise the country won from international bond rating companies in the wake of last year's policy shift. This is important in that Indonesia, despite the relief for the fiscal ledgers generated by the drastic oil and gas subsidy cuts, will remain in fiscal deficit, as it has been ever since the Asian crisis of 1997/98. The shortfall for 2006 is likely to come in at about 1.1 percent of gross domestic product, which is surely not an alarming number, but still reflective of a gap that needs to be financed.

Another step taken by President Yudhoyono that has gone a long way in reassuring international creditors and investors has been one that paves the way for the long-awaited development of the Cepu oil field in central Java. This is a very large deposit, which could add upwards of 170,000 barrels per day (some 18 percent) to Indonesia's total production and restore the country to the position of a net exporter of crude. It may be recalled that Indonesia turned into a net importer in late 2004, in large part because since 2000 there has been no significant new investment in the hydrocarbons sector. In 2005, Djakarta rang up a USD 7.3 billion deficit in oil trade.

Cepu's development has been held up for the past four years by a dispute over whether or not Exxon should be allowed to enter into a deal with the state petroleum company, Pertamina, for a USD 2 billion investment to open up this resource. President Yudhoyono, who during his election campaign had vowed to resolve this problem, finally decided to slash the Gordian Knot by replacing Widya Purnama, an unbending opponent of such an arrangement, as president of Pertamina with the company's trading and marketing director, Ari Soemarno, who is much more favorably inclined toward forming a joint organization with Exxon.

The plan is to have Pertamina set up an operating company in which it and Exxon each have a 45 percent stake. The remaining 10 percent ...