Although Indonesia’s fixed-income market was only valued at around 15% of GDP in 2012, compared to 45% for equities, issuance and investor appetite have grown. The government has sought to rebalance its debt profile towards domestic sources, and the value of outstanding local-currency government bonds has doubled from $41.2bn to $84.9bn in the eight years to August 2013, according to the Indonesian Stock Exchange (IDX). While still marginal as a share of total issuance, outstanding corporate paper has tripled in the same period, from $6.5bn to $19.6bn, enticed by rapidly falling yields. While risk-on/risk-off attitudes among foreign investors have affected volatility since May 2013, issuance should prove resilient and provide higher-yielding instruments.
Investment Grade
Major agencies’ re-ratings of Indonesia to investment grade and greater global appetite for high-yielding bonds have been key, though they also expose Indonesia’s bond market to swings in global risk appetite. Since 2010 several credit ratings agencies have upgraded Indonesia, unlocking more investment from foreign institutional investors. The Japan Credit Rating Agency upgraded Indonesia’s local-currency (LC) debt from “BBB-” to “BBB” in July 2010, followed by upgrades from Fitch in December 2011, Moody’s in January 2012 and Japan’s Rating & Investment Information in October 2012. Only Standard & Poor’s has maintained its junk status on concerns over slow infrastructure development. “Japanese institutional investors really started investing in the Indonesian market following JCR’s upgrade in 2010,” Erwan Teguh, CIMB Securities’ head of research, told OBG. Government bond yields fell significantly as a result of higher investment, from around 16% to an average of 6.5% in the eight years to 2013, according to Credit Suisse. While low by historical standards, these yields remained in the higher emerging market tier. As a result, global emerging market bond indexes from HSBC, JP Morgan, Citi and Barclays have expanded their allocations to Indonesian bonds to between 10% and 12%, for fear of under-performing emerging market return benchmarks.
Investor Appetite
Foreign investors’ share of total government bond holdings has grown consistently, rising from 28.4% in June 2012 to a peak of 32.6% by the end of March 2013, the highest share in emerging Asia, before falling back slightly to 31% by August 2013. The imposition of a six-month minimum holding period for Bank Indonesia (BI) certificates (reduced to one month in August 2013) also prompted a flow into government securities. The second-largest holders after banks, foreign investors have diversified to include smaller fund managers. “We have seen some new foreign buyers come to the bond market in the past few years – smaller names from Europe and the US,” Ali Setiawan, HSBC’s senior vice-president of global markets, told OBG.
Foreigners have shown a preference for long-dated bonds, with some 44% of foreign-held government bonds at maturities of 10 years or more. While foreign investors have sold part of their holdings since May 2013, due to currency and macro imbalances, local institutionals raised their share of outstanding bonds. Banks’ share of outstanding government bonds fell from nearly 80% in 2003 to 36% by August 2013. Other major holders of government debt include insurance firms, with 13% of bonds in August; mutual funds, 5%; and pensions, 4%. Local institutions dominate the less liquid corporate bond market, with pension funds holding 29.6% of corporate bonds in August 2013; mutual funds, 21.7%; banks, 21.14%; and insurance firms, 14.14%.
Government Curve
As the domestic stock of government debt rose from 45% to 55% in the seven years to 2012, according to BI, local issuance has grown. Total outstanding LC-government debt grew 12.3% year-on-year to Rp888.5trn ($88.9bn) by June 2013, according to the Asian Development Bank (ADB), with a strong bias towards fixed-rate paper, which accounted for 71% of outstanding bonds in the second quarter of 2013.
Sovereign issues have become more diversified, with the first launch of a LC sukuk (sharia-compliant bond) and a 30-year conventional bond, both in 2007. By June 2013 three main types of sukuks were in use: traditional sukuks, accounting for 1.9% of outstanding bonds; retail sukuks (4%); and project-based sukuks (2.7%). The government launched a dollar-denominated onshore bond at end-2013 to increase onshore investment options, while planning for bond-switches from LC bonds to dollar-bonds to reduce refinancing risks. The pace of issuance was sustained through 2013, despite higher yields, to support the government’s full-year Rp231.8trn ($23.2bn) net issuance target.
Corporate Paper
While much smaller at 18.75% of outstanding bonds in August 2013, the corporate bond market has grown much faster, albeit from a low base. Leveraging on a liquid government risk-free yield curve, blue-chip corporates have increasingly tapped fixed-income instruments as an alternative to traditional bank lending at lower rates and longer maturities. Growth in corporate bonds reached 38.1% y-o-y in first-quarter 2013 and 23.6% in the second quarter, the fastest rate in emerging Asia, reaching Rp205.4trn ($20.5bn) by end-June 2013, according to ADB. Conventional bonds accounted for 84.8% of outstanding bonds, with sukuks making up the balance, while average maturities were shorter at between three and five years. Although the values raised are typically smaller, at between Rp1trn ($100m) and Rp3trn ($300m), the combined value of issues rose from Rp45trn ($4.5bn) in 2011 to over Rp60trn ($6bn) in 2012.
Newcomers such as commodity and consumer goods firms joined traditional issuers, including multi-finance companies (MFCs), banks, property developers and state-owned enterprises, although the latter still dominate issuance. The largest issues in 2013 included Astra Sedaya Finance (raising Rp3trn, $300m), Bank OCBC NISP (Rp900bn, $90m), Bank Victoria (Rp500bn, $50bn) and Agung Podomoro Land (Rp1.2trn, $120m). The three issuers with the largest outstanding debt stock by second-quarter 2013 confirm this trend: state-owned power utility PLN had Rp14.2trn ($1.42bn) in outstanding bonds, followed by Indonesia EximBank with Rp13trn ($1.3bn) and Astra Sedaya Finance with Rp10.7trn ($1.1bn). MFCs are regular issuers given their requirements for working capital in order to fund lending. “Most MFC bond issuers in the first half of 2013 did so to generate working capital and manage their assets-to-liabilities maturity mismatches,” Iwan Wisaksana, senior vice-president at Kresna Graha Sekurindo, said.
Bear-Market Issuance
Despite the hike in LCbond yields of some 270 basis points between May and September 2013 – ending at yields of 8.6% on benchmark 10-year government bonds – the fixed-income market will continue to see several forms of issuance activity. Although the government has expanded its plans for foreign currency bond issuance from 14% of issuance to 18-20%, with a $1.5bn sukuk issue lasting five and a half years at 6.125% in September 2013, the government is still issuing a combination of fixed-rate LC-bonds, retail bonds and Treasury bills.
In the corporate market, while planned issues by the likes of CIMB Niaga and state-owned Kimia Farma have been delayed, traders expect continued issuance from MFCs like Adira Dinamika Multifinance, who may have little other choice than to accept higher coupon rates. Given Bank Indonesia’s discouragement of banks from lending to import-dependent sectors like telecoms and automotives, some corporations may shift to the fixed-income market. “Despite the hike in coupons since May 2013, we are likely to continue seeing some corporate bond issues due to their fixed long-term nature – bank borrowings tend to have floating rates,” Harry Su, Bahana’s head of equities and research, told OBG. Indeed, in October 2013 Adira announced a five-year fixed bond at an 11% yield. These planned bonds, which would have shorter maturities of about three to five years, would not be guaranteed by the central government and would therefore need to be backed by specific, commercially viable projects.
As inflation cools and BI pauses its benchmark interest rate hikes throughout 2014, the pace of issuance is expected to rebound. “While corporate bond issuance has slowed amid rising yields, we expect these to resume once BI stops hiking interest rates and as inflation returns to trend,” Purbaya Yudhi Sadewa, head of the Danareksa Research Institute, told OBG.
Prospects
Higher yields have raised the state’s cost of funding and resulted in delays regarding corporate issues, but are a draw for institutions and high-yield-seeking investors that have returned to the market since late September 2013. The fundamentals of growth remain steady, as reflected in credit ratings agencies’ reaffirming its ratings since the outflows from May 2013. The government has space to issue more debt, while blue-chip corporates will return to market as the impact of higher domestic lending rates sinks in.
While the correction has shown how fickle speculative foreign portfolio inflows are, it also reveals an appetite from long-term value investors. Although more vulnerable to changes in global risk appetite than other Asian markets, like Thailand, Indonesia’s fixed-income markets will continue to deepen in the coming years.
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