CORRECTED (OFFICIAL)-Indonesia offers guarantees to woo lenders, boost recovery

(Corrects proportion spent on pandemic relief in 7th paragraph to just over half, not two thirds, based on data from ministry)

JAKARTA, Nov 5 (Reuters) - Indonesia’s government said on Thursday it would offer sovereign guarantees for loans on businesses and projects that can boost economic recovery, as it steps up efforts to bolster an economy battered by the coronavirus pandemic.

Despite having ample liquidity in the banking sector, the government has been struggling to spur loan growth due to a lack of appetite to expand businesses, while lenders are also keen to hedge risks amid uncertainty during the pandemic.

Under a new regulation released on Thursday, the government will provide a guarantee against default risks for loans, debt securities and other risks for financial institutions that will provide loans for state and municipality-owned companies, regional governments, as well as private companies.

The government will cover both the principal and interest of the loan made by non-private companies at the time of default.

For private firms, however, the government’s coverage would depend on the their financial conditions and ability to pay.

Criteria for eligibility for the guarantee will be issued later, but the regulation said all projects are required to support economic recovery or be part of the National Economic Recovery Programme (PEN), Indonesia’s pandemic relief budget.

Indonesia has set aside 695.2 trillion rupiah ($48.38 billion) for the PEN, which include health-related spending and social protection programmes. So far, the government has spent just over half, or 366.86 trillion rupiah, according to data from a presentation by the chief economics minister Airlangga Hartarto.

The country suffered its first recession in over two decades as its gross domestic product shrank by 3.49% year-on-year in the third quarter due to the pandemic. ($1 = 14,370.0000 rupiah) (Reporting by Maikel Jefriando; Writing by Tabita Diela; Editing by Martin Petty)