JAKARTA (TheInsiderStories) – Fitch Ratings believes that the Indonesian authorities’ recent initiatives to cut borrowing costs and support economic growth will not have immediate benefits for Indonesian non-financial corporate bond issuers although the moves are important for deepening the local debt market in the longer term.
Last month, Indonesia’s central bank issued a new regulation allowing non-bank corporates that meet certain requirements to issue commercial paper maturing in one year or less. Fitch believes the revival of the commercial paper market would help diversify instruments traded in Indonesia’s money market and benefit many local corporates as the notes could work as an alternative to banks’ credit lines. Bank loans remain the primary source of debt funding, accounting for 90% of total debt in 2016. Five years after Fitch upgraded Indonesia to BBB- and hence paving the way for foreign inflows, outstanding bonds and sukuk issued on the local exchange have grown by CAGR of 21%, exceeding banking loan growth of 19% and external funding growth of 10%. Notwithstanding Indonesia’s investment grade status, however, based on data from Kustodian Sentral Efek Indonesia, foreign investors hold only around 6%-7% of outstanding corporate bonds.
Fitch does not expect the new regulation to significantly increase the number of companies tapping the debt market to reduce their reliance on bank loans. Issuing commercial paper or other debt instruments may not be appealing to many potential issuers as it does not always translate to lower total borrowing costs. Competition in the local bond market is intensifying as companies including state-owned enterprises have steadily increased issue sizes while the local investor base remains limited. Due to insufficient demand, many issuers have been forced to reduce the issue size or increase the bond coupons they offer to attract investors. In the first half of 2017, around IDR56.5 trillion was raised through corporate bonds and sukuks in the local bond market by 29 companies compared with IDR46.7 trillion raised by 26 companies a year earlier.
The authorities have stepped in to boost demand including a 2016 regulation that requires insurance firms and pension funds to allocate at least 20% of their investment portfolio to bonds or sukuks. However, the ability to tap the debt market is strongly influenced by the issuers’ credit quality profiles. Fitch observes that the issuance of Indonesian corporate bonds and sukuks has increased recently although the number of issuers is relatively unchanged. There were 111 companies with outstanding bonds/sukuk at the end of 2016 compared with 96 in 2011.
Many companies failed to issue debt instruments as their credit profiles did not match investor conditions. The government has lowered the rating requirement for local institutional investors such as insurance companies and pension funds so that they can invest in securities in the ‘BBB’ category compared with the previous requirement of a minimum rating of ‘A’ on the national scale. However, this relaxation has not raised the number of issuers as many institutional investors have internal policies that only allow them to invest in instruments that are in compliance with their own policies. Consequently, existing corporate bonds/sukuks are still clustered in higher ratings. Less than 5% of the IDR113 trillion in primary issuance of bonds and sukuk in 2016 were rated ‘A-‘ or below on the national scale.
The authorities are also preparing the tools to enable Indonesian companies to issue local-currency corporate borrowings in global debt markets to help companies meet their funding needs while reducing vulnerabilities to exchange-rate fluctuations. Fitch views the plan positively as this would shift the currency risk from the issuers to foreign investors even though many Indonesian companies have successfully issued US dollar-denominated global bonds. However, foreign investor appetite remains to be tested as they tend to be more conservative when investing in Indonesian corporate bonds because the secondary market is relatively illiquid. While foreign buyers account for about half of Indonesia’s equity market and hold a significant portion of Indonesia’s sovereign government bonds, they take up only 6%-7% of the local bond market. (RF)