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Indonesia markets 3b euros of bonds to plug funding gap

[JAKARTA] Indonesia is marketing 3 billion euros (S$4.61 billion) of bonds in its third offering in the currency in three years as the government broadens its investor base to fund a budget deficit that's approaching the legal limit.

The nation is offering 1.5 billion euros of seven-year notes at 260 basis points above the euro mid-swap rate, and 1.5 billion euros of 12-year securities at a 325 basis-point spread, according to a person familiar with the matter who asked not to be identified. That compares with a 250 basis-point premium it paid on 10-year paper in 2015. Both are below the initial price guidance of as much as 280 and 345 basis points, respectively.

President Joko Widodo is considering a larger deficit target of 2.48 per cent of gross domestic product, from 2.15 per cent, as tax revenue falls short. He's also seeking to pass a tax amnesty bill to encourage individuals and companies to repatriate undeclared funds as the deficit nears the 3 per cent limit in place since the 1997 Asian financial crisis. Investors are showing confidence in Asia's best-performing bonds, plowing almost US$5 billion into the country's debt this year.

"A large international sale will help put a big dent in the government's funding needs and reduce future bond supply, which is good for prices," said Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas in Jakarta.

"The tax shortfall is a concern, but we think the 3 per cent limit will ensure fiscal prudence."

Mr Widodo needs to finance a US$360 billion five-year development program put in place in 2015 to build railways, power plants and seaports. He's cut ministerial spending to try and lower the budget deficit after tax revenue was only 28 per cent of the target at the end of May.

Indonesia sold 1.25 billion euros of 10-year securities last year and got orders for 1.9 times the amount on offer, with the most bids coming from investors in the US.

Its debut offering of 1 billion euros of seven-year notes in 2014 saw bids of 6.7 times. The government sold US$2.5 billion of US currency Islamic bonds in March this year and received interest for US$8.6 billion.

The bond plan comes a week after S&P Global Ratings refrained from raising Indonesia's credit ratingto investment grade, which would have put it on par with assessments at Moody's Investors Service and Fitch Ratings. Schroder Investment Management Ltd called the decision disappointing.

Deutsche Bank AG, Societe Generale SA, Barclays Plc and JPMorgan Chase & Co arranged the latest euro sale.