BackJoko Widodo wins bond-market friends over India on debt sales
Indonesia's local bonds have handed investors a 8.2% return this year, compared with 3.4% on Philippine notes and 1.7% for Indian debt
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Singapore: Indonesia’s debt sales are poised to decline through 2015, giving investors another reason to buy bonds that produced the best returns in Asia last year after India.
President Joko Widodo’s administration will reduce domestic issuance by as much as 18% this year as a cut in fuel subsidies to the nation of 254 million bolsters state coffers, according to HSBC Holdings Plc. PineBridge Investments said bond sales will drop as the nation’s fiscal deficit shrinks, even as the government provides for higher borrowings in a budget yet to be approved by parliament.
The declining cost of oil imports, waning parliamentary opposition to Widodo three months after he took office and the prospect of faster economic growth are combining to boost demand for Indonesian bonds, the best-performing local-currency debt in Asia this year. Schroder Investment Management Ltd and AllianceBernstein LP expect returns to beat India’s.
“The supply dynamics will be favourable," Rajeev De Mello, who manages about $10 billion as head of Asian fixed-income at Schroder in Singapore and has more Indonesian and Indian bonds than the benchmarks he uses to gauge performance, said by phone Wednesday. “In the short term, perhaps Indonesia benefits more."
Indonesia’s local bonds have handed investors a 8.2% return this year, compared with 3.4% on Philippine notes and 1.7% for Indian debt, Bloomberg indexes show. India was the best performer in 2014 with a return of 17%, followed by Indonesia at 13%. A gauge of Asia’s developing economies advanced 7.8%.
Subsidies, deficits
Widodo scrapped gasoline subsidies and capped aid for diesel from 1 January to free funds for development. India ended controls on diesel and raised natural gas prices in October. Central banks in both countries expect inflation to ease after oil prices declined to the lowest since 2009.
Indonesia aims to cut its budget deficit to 1.9% of gross domestic product (GDP) this year from 2.3% in 2014. India is targeting a 4.1% shortfall in the year ending March 2015 and 3.6% the following year.
Indonesia’s 10-year yield has dropped 103 basis points, or 1.03%age points, from this year’s high on 7 January to 7.09% on Wednesday, data compiled by Bloomberg show. That’s more than seven times the 13 basis point decline for similar Indian notes. The benchmark Indian yield slid 97 basis points in 2014 compared with a 66 basis point decline in Indonesia.
‘Most dramatic’
The impact has been “most dramatic" in Indonesia, where yields are reflecting the prospect of lower bond supply and inflation, Anthony Chan, a Hong Kong-based Asian sovereign strategist at AllianceBernstein, which manages $474 billion, said by phone on 3 February.
Indonesia’s net issuance, which excludes sales to replace maturing debt, will drop to to 217 trillion rupiah ($17.2 billion) in 2015 from 265 trillion last year, HSBC analysts led by Andre de Silva in Hong Kong, estimated in a 19 January report. Widodo’s government said the same day it may borrow a net 308.3 trillion rupiah this year, or 16% more than in 2014.
Targets proposed in the 2015 budget are yet to be finalized by parliament, and the Finance Ministry will decide on actual issuance, Robert Pakpahan, director general of the ministry’s debt management office, said in a mobile-phone text message Wednesday.
PT Mandiri Sekuritas expects debt sales to increase as the government aims to inject funds into state enterprises tasked with improving infrastructure, Handy Yunianto, Jakarta-based head of fixed-income research at the unit of Indonesia’s biggest lender by assets, said by phone yesterday. However, it may take more time to get projects for building roads, ports and power plants going, said De Mello from Schroder.
Bond inflows
In 2013, Indonesia and India paid a price when global funds shunned assets of nations with large fiscal and trade imbalances. The rupiah slumped 21% and the rupee fell 11%. Both declined about 2% in 2014.
While the rupee has rebounded this year, the rupiah has extended its slide. Global investors increased their holdings of Indonesian bonds by $3 billion in 2015, and added a net $4 billion of Indian notes. The differences may be explained by how subsidies and oil prices affect deficits in both countries.
Moody’s Investors Service estimates savings from fuel reforms amount to 2% of Indonesia’s GDP and 0.5% of India’s. While both benefit from cheaper oil, the wider slump in global commodities reduces Indonesia’s earnings from exports such as coal and palm oil, senior vice president Atsi Sheth said in a 29 January briefing in Singapore.
Imports meet about 80% of India’s petroleum needs compared with 40% for Indonesia, which lost its net oil-exporter status as production dwindled.
“India and Indonesia rank very highly in our local currency framework," Anders Faergemann, a London-based senior portfolio manager at PineBridge, which oversees $70.8 billion, said in a 23 January e-mail. “Indonesia’s authorities have been quick to take advantage of the oil price adjustment and have shown a desire to eliminate a big chunk of the distortions in the budget from fuel subsidies."
To contact the reporter on this story: Bloomberg
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