Finance Minister Sri Mulyani Indrawati (fourth right) pushes a button to symbolize the opening of trading activity at the London Stock Exchange on Jan. 29, while State-Owned Enterprises (SOE) Minister Rini Soemarno (second right) and Wijaya Karya (Wika) president director Bintang Perbowo (third left) wave flags. (Photo: WIKA)

JAKARTA (TheInsiderStories) – Indonesia expects further inflows from foreign investors into its debt market after news that local currency bonds will be added to a global bond index in June 2018, strengthening the nation’s confidence amid regional currency volatility.

Indonesian rupiah-denominated bonds eligible for the widely used in Bloomberg’s Global Aggregate Index will also have a positive impact on the image (confidence in) and competitiveness of Indonesian bonds as the index covers investment-grade bonds.

Several local companies have reiterated their intention to issue global bonds this year to fulfil their funding capacity. State-owned flag carrier PT Garuda Indonesia Tbk (IDX: GIAA) said it will issue global bonds worth US$750 million or around Rp10.2 trillion to fund its operation and refinancing.

In addition, state-owned port management company PT Pelindo III will issue global bonds worth US$1 billion this year to fund several development projects to support government maritime goals.

Considering that the listing in the index makes Indonesian bonds more attractive, the foreign ownership ratio is estimated to rise further. The danger of this situation is that in times of global turmoil, Indonesia may be plagued by a higher degree of capital outflows.

The weakening of U.S dollar and a rising of U.S treasury yields will put a dampener on U.S investment grade bonds as the pace of the Fed’s tapering picks up this year and expectations of additional supply into the market to fund the fiscal deficit.

To anticipate capital outflows, the Indonesian government put in place the bond stabilization framework several years ago. This is a program in which the government securities are bought through the State Budget or by state-owned enterprises in an attempt to support Indonesian securities in times of turmoil and capital outflows.

Bank Indonesia (BI) Governor Agus Martowardojo has predicted that the Indonesian Rupiah’s exchange rate against the US Dollar will continue to be volatile until March 20-21, or when The Federal Reserve announces its reference rate policy.

He said the central bank is ready to stabilize the market if the rupiah’s exchange rate against the dollar is no longer relevant to the country’s economic fundamentals.

“If there is any volatility or fluctuation away from its fundamental value, Bank Indonesia will surely be present,” he said.

Bank Indonesia has also introduced a hedging requirement for companies that borrow abroad and also imposed a rupiah transaction requirement to lower the demand for U.S dollar by residents in conducting domestic transactions.

However, Indonesia is still running a current deficit around 2.1 per cent of GDP. While this is a very manageable level, the safe level is 3 per cent – if there is a risk-off event it could trigger an outflow, which would result in pressure on the currency.

Kim Eng Tan Sovereign and International Public Finance Ratings at S&P Global Ratings expects this year foreign direct investment into Indonesia to continue on the back of the investment grade (IG) ratings. Indonesia may see a positive outlook this year which should spark more interest in Indonesian bonds.

“Post the surprise cut in benchmark rate late last year to 4.25 per cent, we do not expect further cuts this year, with inflation well within Bank Indonesia’s target range. We are vigilant of the recent depreciation of the rupiah where a sharp move could prompt action to be taken by Bank Indonesia,” he said.

Foreign investors already hold 40.4 per cent of Indonesia’s Rp 2,119 trillion ($148 billion) of outstanding rupiah-denominated government bonds. That compared to a 39.8 per cent ownership at the end of 2017.

Email: elisa.valenta@theinsiderstories.com

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