Accounting on change: Businesses and the government are turning to bond sales to fund infrastructure investment


The government is increasingly tapping international bond markets as it advances a substantial infrastructure agenda. The country issued Asia’s largest sovereign bond in 2016, pushing total annual bond issuance above the $10bn threshold, while state-owned enterprises (SOEs) have increasingly sought bond financing for major infrastructure projects such as port upgrades and a planned light rapid transit (LRT) system in Jakarta. Bond issuance in foreign currency is also becoming increasingly popular following the successful issuance of euro- and yen-denominated bonds in mid-2016.

Sovereign bond issuance is expected to accelerate in 2017, supported by ratings agency Standard & Poor’s (S&P) upgrade of the country’s sovereign credit rating in May 2017. This followed several successful fiscal reforms to improve governance and generate revenue, as well as consistently robust macroeconomic expansion, rising middle class demand and a positive growth outlook for 2017.

In addition to funding infrastructure upgrades, tapping international debt markets will also help keep deficits from exceeding 3% of GDP, an important consideration following years of revenue shortfalls.

FOREIGN CURRENCY: The government has mitigated some revenue shortfalls through international bond markets, as evidenced by several successful foreign currency issuances in 2016.

In June 2016 the country sold €3bn of euro-denominated bonds, which included €1.5bn worth of seven-year-tenor bonds with a 2.8% yield, and €1.5bn worth of 12-year-tenor bonds with a 3.9% yield, making this the country’s largest-ever eurobond sale.

The issuance was oversubscribed 1.79 times, with the total book order reaching €8.4bn. Proceeds were earmarked to meet a 2016 budget shortfall, which was forecast to rise to 2.48% of GDP after the government fell short of its 2016 revenue targets.

The government then issued Samurai bonds, which are yen-denominated and issued in Japan by non-Japanese companies. The Ministry of Finance (MoF) reported it raised JPY100bn, valued at $942m as of mid-2017, with a private placement of Samurai bonds to institutional investors in Japan.

The issuance included two types: series G, worth JPY62bn ($584m), with a three-year-tenor and a 0.83% coupon; and series H, worth JPY38bn ($358m) of five-year bonds with a 1.16% coupon. This marked the first domestic Samurai bond issuance not guaranteed by the Japanese government, indicating strong investor confidence in the market.

Another major development came in December 2016 when Indonesia issued Asia’s largest sovereign bond of the year. The country sold $750m of dollar-denominated bonds due in January 2022 with a 3.75% yield, $1.25bn worth of 10-year bonds with a 4.4% yield, and $1.5bn of 30-year bonds with a 5.3% yield.

This was the first time any sovereign borrower issued dollar notes with three different maturities in a single deal, bringing Indonesia’s total sovereign bond issuance for 2016 to over $10bn.

STATE FIRMS TAP BOND MARKET: Several SOEs and listed corporations have also turned to bond issuance to finance major infrastructure projects. In June 2016 three SOEs – including Bank DKI, which is owned by the Jakarta government – issued bonds worth a collective Rp4.5trn ($339.2m) to support expansion plans. The bank intends to use its Rp1trn ($75.4m) of bonds to fund credit expansion. Bonds will be issued in several phases until June 2018, carrying an 8.5-9.4% coupon rate.

The other two SOEs are using bond financing for infrastructure development. State-owned airport operator Angkasa Pura II issued an Rp2trn ($150.8m) bond with an 8-9.25% coupon rate, with plans to use revenues for its airport expansion.

The issuance comprises three series: with a five-year, a seven-year and a 10-year tenor. The bonds received a rating of “idAAA” from ratings agencies Pefindo and Fitch Ratings Indonesia, with 92% of proceeds to be used for the expansion of Soekarno-Hatta International Airport in Jakarta, and the remaining 8% to be put towards other airport projects.

Listed energy firm Medco Energi Internasional also issued an Rp1.5trn ($113.1m) bond in two series: one has a 10.3-10.8% coupon rate for a three-year term, and another with a 10.8%-11.3% rate for five years. Of this, m will be capital spending as the firm plans to raise Rp5trn (6. (Provigil) 9m) through rights and bond issuance.

PORTS & RAIL: In May 2017 state-owned construction firm Adhi Karya announced it would issue Rp5trn ($376.9m) in bonds through 2019.

With a five-year maturity and an annual yield of 8.75-9.5%, payable each quarter, they will be used for refinancing and capital injections to its subsidiaries. Adhi Karya had Rp4.4trn ($331.7m) of contracts in April 2017 – including an LRT system – of which it has already invested Rp2trn ($150.8m). Bonds will also be used for Jakarta’s LRT construction.

These come after Pelabuhan Indonesia II (Pelindo II) issued bonds worth $1.6bn in May 2015, divided into two tranches: one for $1.1bn maturing in 2025; and one for $500m maturing in 2045. The funds will be used for capital expenditure on a planned Rp50trn ($3.8bn) port upgrade programme, which includes the construction of the new Priok Port in Jakarta (see Transport chapter).

S&P UPGRADE: Sovereign bond issuance is increasing, supported by the May 2017 announcement that S&P upgraded Indonesia’s sovereign credit rating to investment grade, joining Fitch and Moody’s. S&P lifted the rating from BB+ to BBB- with a stable outlook, attributing this to improved national budgeting and reduced risks to fiscal metrics.

This came after reductions in the budget deficit and a large tax amnesty programme caused nearly Rp5000trn ($376.9bn) of onshore and offshore assets to be declared in a nine-month period.

With all three major agencies classifying sovereign bonds as investment grade, Indonesia has new potential for large institutional investors, with many only permitted to invest funds in countries endorsed by them.

IMPACT: The benchmark Jakarta Composite Index jumped by 2.59% immediately after the announcement, closing the day at an all-time high of 5791.8 points, then rising to 5910 in July 2017. The rupiah also appreciated 0.23% against the dollar to reach a rate of 13,335:1.

Financial and capital accounts surplus was $7.9bn in the first quarter of 2017, against $7.8bn in the fourth quarter of 2016 and $4.1bn in early 2016, with growth attributed to rising portfolio investment flows into rupiah-denominated instruments and government sukuk (Islamic bonds).

While the MoF has announced it does not plan to recklessly accumulate new debt, the upgrade is expected to affect foreign inflows.

In March 2017 global investment agencies predicted that an S&P ratings upgrade would increase investment flow to Indonesia from Japan.

Following the announcement analysts expected both rupiah- and foreign-denominated bond issuance to grow, with yields to decline as costs of funds decrease, making bonds an increasingly attractive option for both the government and any business benefiting from an investment-grade rating.

Investor interest in sovereign and corporate bonds is partly due to political stability and steady macroeconomic growth, although external risks, including geopolitical turmoil, could affect future demand.

CORPORATE BONDS: Seven domestic companies sold foreign-denominated bonds between January and April 2017, raising $1.9bn. Indonesia Stock Exchange data suggests there are another Rp35.2trn ($2.7bn) worth of bond issuances – including sukuk – planned for 2017. Companies also use corporate bonds to fund infrastructure, transportation and construction.

For example in 2017, Tower Bersama Infrastructure planned to issue a $500m bond to refinance its $1.4bn debt; telecommunications infrastructure firm Solusi Tunas Pratama planned to sell $400m of bonds through its subsidiary, Pratama Agung, to boost liquidity; manufacturing firm Steel Pipe Industry of Indonesia wanted to sell $250m of bonds in the second half of 2017; and maritime transportation company Soechi Lines will issue approximately $300m of bonds for both debt payments and a fleet expansion.

Sovereign bond issuance is also set to increase. In December 2016 local media reported that in 2017 the government planned to issue dollar-, yen- and euro-denominated bonds totalling Rp149.2trn ($11.2bn), with the budget calling for Rp597trn ($45bn) of annual government security issuance. This should help keep the deficit below Rp330.2trn ($24.9bn), or 2.41% of GDP.