Indonesia: Going to the capital markets

A series of large-scale government bond issues in Indonesia is the latest sign of the benefit of an improved credit rating in accessing international capital. The government is lining up a $1.75bn global bond issue for October, including a $1bn sukuk (sharia-compliant bond) and $750m worth of Japanese yen-denominated conventional bonds.

Indonesia has taken to the international markets enthusiastically in 2012 as it seeks to capitalise on low yields to support the national budget, help plug the deficit and fund infrastructure spending.

In April, the government issued a two-tranche $2.5bn conventional bond, including a $2bn, 10-year issue and a $500m, 30-year note. As of early September, the former, originally priced at 3.75%, was yielding around 3.2%, while the latter was yielding 6.7%, first priced at 5.25%.

As the international press has reported, Indonesia’s low credit-default swaps (CDSs, the cost of insuring the country’s debt in case of default) are currently quite low – a sign of investor confidence. Five-year CDSs stood at around 170 basis points in early September, down from 255-plus in June.

The relatively low cost of issuing debt (and sukuk) provides Indonesia with an opportunity to fund public spending. In August, President Susilo Bambang Yudhoyono pledged to increase capital spending by 15% to Rp193.8bn ($20.2m) in 2013, with much of the cash focused on improving the road network and constructing 15 new airports. Priorities include tackling Jakarta’s chronic traffic problems and enhancing connectivity across the archipelago.

This year’s sovereign bond and sukuk issues are likely to be followed by more next year. According to the draft of the 2013 budget released on August 17, the government will seek to bring in a net Rp177.3trn ($18.55bn) through local and foreign sales, one-third more than original plans and 11% above the amount likely to be raised this year.

Indonesia is benefitting from its increasingly sound macroeconomic fundamentals, and the resultant decision of ratings agencies Fitch (in December 2011) and Moody’s (in January this year) to raise its sovereign credit rating to investment grade. The upgrade may have been an important tipping point for sovereign bonds, putting them on the radar for the many international funds and vehicles that only take on higher-grade debt.

However, the rating still stands at BBB-, at the lower end of the investment-grade spectrum, and the government is seeking to move higher up over the coming years through coordinated efforts of official institutions.

Conveniently, the ongoing bond issues may both directly and indirectly help enhance Indonesia’s rating in the medium to long term. Directly, continued foreign appetite for Indonesian debt and sukuks indicates and reinforces confidence in the country, while indirectly, investments in infrastructure should help tackle bottlenecks that contribute to one of the most significant risk factors for the economy – inflation. Inflation unexpectedly picked up in August to 4.58%, and may rise to above 5% next year, according to international press reports. Standard & Poor’s, another ratings agency, suggested in April that Indonesia should look to shift budget spending towards infrastructure investment and away from subsidies.

With bond markets looking favourably upon Indonesia, and road infrastructure a priority, state-owned highway company Jasa Marga (JM) announced in early September that it is also lining up a debt issue. The local press reported that JM was looking to issue new debt papers to refinance Rp1.77trn ($185.14m) of bonds due to mature at the second half of 2013. The firm’s management are keen to secure the continued backing of the financial markets as JM pushes on with its 10 construction projects currently underway.

While sovereign issues are performing well, Indonesia will also be hoping to encourage more bond launches by Indonesian private firms, which can take advantage of the relatively benign economic climate and investor appetite for opportunities in one of the world’s most dynamic emerging markets. Currently, the stock market continues to face the challenge of relatively low liquidity, making debt and sukuk issues an attractive potential outlet for companies looking to raise capital. However, firms will need to ensure that they adhere to international standards of transparency and accounting if they are to attract foreign investment.

Public and private issuers alike will also be aware that while Indonesia continues to perform remarkably well in the face of international economic uncertainty, it is not immune from it, as a September report from the Asian Development Bank (ADB) noted. “Our local currency bond markets are emerging as a safe haven in the midst of the crisis, but we should not be complacent,” said Iwan Azis, the head of the office of regional economic integration at the ADB, when speaking with the international press.

A degree of caution about the global outlook is well placed, and Indonesia can do more to improve its sovereign rating and encourage the private sector to take to the bond markets to help them grow. Then the country should be able to take even better advantage of its rising profile among international investors.

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