Indonesian Sovereign Bond Yield Trending Downward This Year

JAKARTA (TheInsiderStories) – The yield-to-maturity of Indonesian sovereign bonds continues to drift lower this year, following Standard & Poor’s (S&P) award of an ‘investment grade’ rating and oversupply of sovereign bonds following last Wednesday’s (3/1) auction.

Indonesia’s government sold Rp25.5 trillion (US$1.89 billion) on Wednesday, higher than an indicated target of Rp17 trillion, its Financing and Risk Management Office of Ministry of Finance reported in a statement.

The Ministry sold T-bills maturing in April 2018 with a weighted average yield of 4.18 per cent, while T-bills maturing in January 2019 had a weighted average yield of 4.98 per cent.

Bonds maturing in May 2023 were sold with a weighted average yield of 5.79 per cent. Those maturing in May 2028 had a weighted average yield of 6.23 per cent.

The weighted average yield for bonds maturing in May 2038 was 6.99 per cent, lower than the 7.26 per cent marked at a previous auction on Nov. 14.

Total incoming bids reached Rp86.21 trillion on Wednesday’s auction, compared with Rp38.92 trillion bids in the previous auction.

Last year in the same period, the yield on 10-year benchmark bonds hovered at 7.78 per cent. When S&P upgraded Indonesia’s rating in May 2017, this sank to 6.93 per cent (May 22, 2017). Fitch‘s rating upgrade also dragged it downward to 6.29 per cent, as of Dec. 29, 2017.

Bank Central Asia‘s Chief Economist David Sumual predicdts this year’s yield movement may not decline so easily or quickly, because of risks in domestic financial markets, such as U.S monetary tightening and tax reform.

“The domestic fundamentals themselves look good, with stable inflation and CAD. Still, there is a risk that the federal rate hike may move more quickly, as oil prices continue to rise, so that inflation may rise and the Rupiah could become more volatile – which will harm the bond bull market,” he said.

He added that Indonesia’s government bonds are still quite appealing and lucrative this year. As the largest issuer of bonds, the Government of Indonesia regularly taps the local market to finance the state budget.

The Indonesia government bond forms vary from conventional and retail government bonds to government Sukuk in several tenors. Municipal bonds are issued by provincial or regency governments for financing public utilities projects.

“Although foreign ownership is already at 40 per cent, there is an obligation of pension funds to buy 30 per cent and general insurance to put 20 per cent on the market. This can also excite the market,” Sumual said.

However, he said, there is still a chance of a decline in government bond yields, because Moody’s may raise Indonesia’s rating this year. Moreover, other rating agencies may also spur Indonesia’s rating upward this year.

“This year, Standard and Poor’s (S&P) also seems like it is going to change Indonesia’s outlook even though the rating may be unchanged,” he said.

Bank Permata economist Josua Pardede also expects that the trend to lower yields this year is slower than last year. Even, it should potentially rise in the second half, in line with the projected increase in the Fed’s benchmark rate.

Meanwhile, Finance Minister Sri Mulyani Indrawati remains optimistic about the country’s strong position among emerging countries, so that when external sentiment is shaky, Indonesia can still enjoy a stable perception.

“Because we are known for sound fiscal policy, our budget is credible, government revenue is more solid with prudent spending, so that the economy is also positive. Purchasing power is increasing, growing in the middle class. Thus, the balance of payments is good enough with a controllable deficit position” she said.

Managing Foreign Debt

The Government debt burden remained low at 28.5 per cent of GDP last year, thanks to a self-imposed budget-deficit ceiling of 3 per cent of GDP, which has helped maintain investor confidence in Indonesia during times of market turbulence.

The primary balance of the state budget —the government’s capacity to meet its debt servicing burdens (installment and interest payments)— has also been under control: in 2017 it was only Rp 129.3 trillion, or 72 per cent of the target. This indicator shows that, despite the increase in absolute numbers, the foreign debt has become more sustainable.

This took place along with the realization of a budget deficit which was also lower than the government’s prediction of 2.6-2.7 per cent of GDP. The government recorded a state budget deficit of Rp 345.8 trillion last year, or 2.57 per cent of Gross Domestic Product (GDP) as of Dec. 30, 2017. The realization is lower than the target which was 2.92 per cent of GDP.

“Thus, our state budget still has thrust but is still healthy and well-maintained,” said Sri Mulyani.

Written by Staff Writer, edited by Elisa Valenta, email: