TEMPO.CO, Jakarta - There is a major risk to the issuing of regional bonds at the provincial level. Threats come from low fiscal capacity and poor management.

The Finance Ministry and the Financial Services Authority (OJK) must show proper caution in the issuing of the regulations on regional bonds. Regional governments’ eagerness to issue bonds could spell disaster in the long term if it is not balanced with fiscal capacity and good management.

The drawing up of the technical regulations on the issuing of regional bonds is mandated by Law No. 1/2022 on the Financial Relationship between the Central Government and Regional Governments. If there are no obstacles, at the end of the first six months of this year, the Finance Ministry and the OJK will release a regulation for the issuing of regional bonds. Many regional leaders who have many projects but do not have sufficient funding have been waiting for this regulation. Now a number of governors are lining up to obtain permits to sell bonds on the financial markets.

Regional bonds are, on the one hand, an attractive alternative means of funding at a time of regional fiscal constraints. Many important infrastructure projects in the regions have been delayed because of insufficient funding. Unfortunately, the projects that the people need, such as regional hospitals, irrigation and roads, have not attracted the interest of investors because they do not promise big profits. Issuing bonds is one way to raise funds from the financial markets for these public projects.

The problem is that not all regional governments have the ability or are qualified to issue bonds. One crucial problem is the management and ability of human resources to manage trillions of rupiah in debt. According to a publication by the Supreme Audit Agency (BPK) in December 2023, there were several problems in the 2022 financial reports of regional governments that influenced the opinion of the state auditor.

The most serious risk is that of default resulting from regional governments rolling out programs or lighthouse projects that are extremely expensive but bring few benefits and returns on investments. Many examples of serious problems overseas began with the issuing of regional bonds.

In the United States in 1994, Orange County, California, defaulted on municipal bonds that it had issued to the tune of US$1.5 billion. In another case, in 2023, Detroit was unable to pay government bonds worth US$8.4 trillion, which was the largest default in history.

At a time of economic uncertainty, issuing bonds is not a wise policy. The size of the risk will increase the returns that the regions will have to pay to bondholders. As an illustration, the return from the auction of state treasury bonds on March 13 this year is 6.458 percent. The return on regional bonds may be even higher because investors will see a higher risk profile.

On the other hand, total government debt in the form of bonds continues to rise. According to Asia Bond Online, Indonesia’s total outstanding obligations grew by 19 percent from Rp5,314.54 trillion in December 2021 to Rp6,331 trillion in December 2023. This includes corporate debt as well as sovereign and central bank bonds.

Therefore, the rules covering the issuing of regional bonds must be as strict as possible. There must be no room for regional heads with poor fiscal abilities to issue bonds because, in the end, the state will have to bear all the burden.

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