At the forefront of a regional wave of bond sales in 2010, Indonesia continued to enjoy a similar trend in 2011, with several major sales during the year. Moreover, Indonesia’s sovereign debt rating was increased to investment grade in December 2011, which could lower the cost of funds. That should be the catalyst needed to deepen markets for primary corporate debt sales, secondary trading and sub-regional government issuances.
STRONG DEMAND: While in the past there have been concerns about an oversupply of Indonesian bonds, by late 2011 it appeared that investor sentiment toward them had not cooled. One of the main debt sales in 2011 was a 10-year sovereign bond in US dollars sold in late April. The goal was to sell $2.5bn in new debt, and $6.9bn in offers were fielded at a 5.1% yield – a premium of 1.74% or 174 basis points over the yield for US Treasuries, which serve as a benchmark for the bonds of other countries. The government had previously gone to the dollar-denominated bond market in January 2010, when it sold $2bn in 10-year bonds for 5.875%, or 227.9 basis points above US Treasuries. The relatively lower yield for the April 2011 bond was considered a vote of confidence for Indonesia. The external factors influencing that difference make the comparison somewhat difficult to make, however.
FOREIGN OWNERSHIP: Foreigners owned 34% of outstanding Indonesian government bonds as of the end of March 2011 – a higher proportion than anywhere else in South-east Asia, and up from 30.5% at the end of 2010. The next-largest concentrations were in Malaysia, at 22%, and South Korea’s 10%.
Those figures pale in comparison to the figure for US bonds, which are usually about 50% owned by foreigners, but foreign ownership remains a concern in Indonesia, where flows of “hot money” have had a destabilising effect in the past. In recent years, investors have flocked to short-term bonds known as SBIs, the equivalent to a US Treasury bill. SBIs, which mature in three months, are used as an instrument for speculation on the rupiah. To reduce this kind of activity, in July 2010 the government required that SBIs be held for at least a month by the primary buyer and then in November 2010 took a further step of temporarily ceasing sales. As of the summer of 2011 a plan was under consideration to replace SBIs with a nine-month note and perhaps to require a minimum holding period of six months.
INVESTMENT GRADE: Perhaps the biggest potential boost to the market in 2012 will be the effect of the credit ratings upgrade by Fitch in December 2011. Fitch had already boosted its outlook on Indonesia’s long-term sovereign bonds to positive in February 2011, which in the regimented nomenclature of ratings, signalled that a review within 12 to 18 months was likely. Indeed, according to Baradita Katoppo, Fitch’s country director for Indonesia, the market could have already factored in an upgrade.
“Government bonds are trading as if they are investment grade already,’’ Katoppo said in mid-2011.
Although in the case of many emerging markets, receiving investment grade means attracting more foreign interest, in the case of Indonesia the impact is instead likely to come from domestic investors. Foreigners are already invested in the market, although additional interest could come from mutual funds and other vehicles whose rules for investing prevent the purchase of sub-investment-grade debt.
In addition, there are plenty of domestic funds that operate by the same rules. Pension funds, insurance companies and other large-scale institutional investors have, relative to those in other countries, shied away from the domestic bond market. Indeed, Katoppo told OBG that many want at least an A rating on a bond before they invest. Should these investors decide to participate in Indonesia’s bond market in a more meaningful way, the result could be a needed deepening of the country’s capital markets as well as increased ease of buying and selling.