Why borrow? Issue bonds!

JAKARTA (TheInsiderStories) – The Indonesian bond market is performing well nowadays; issuance of corporate bond is higher than expected. Based on the Indonesia Bond Pricing Agency (IBPA) data, until first week of Sept. 2017, new issuance of corporate bonds reached Rp99.92 trillion.

Otherwise, new issuance of Medium Term Notes (MTN) marked Rp13.54 trillion. The value of new issuance of corporate bonds is still higher than over the same period in 2016, which amounted to Rp69.26 trillion.

Wahyu Trenggono, Director of IBPA, explained the current domestic economy seems to be stronger than last year. The issuance of corporate bonds is increasingly showing companies concentrating on debt securities as a means of capital formation. Moreover, Bank Indonesia (BI) is planning a rule that allows the banking sector to buy corporate bonds. If this rule is approved, then the prospect of corporate bonds will be even more attractive.

In addition to taking profits, S&P rating moments are used by foreign investors to look for other appealing investment instruments that offer yields not much different from stocks.

“Bonds are a positive choice, as well as global, ones because inflation is low,” observed Wahyu.

The momentum for issuing bonds for corporations this year is promising, given the low yield of government bonds. Bank Indonesia’s interest rate and deposit insurance rate were also cut 25 basis points.

Although the central bank has cut the benchmark interest rate several times, the decline of bank credit interest rates has not been nearly as far as the decline in deposit rates. Thus, corporations prefer to issue debt securities rather than taking out bank loans.

“Only from the banking side, indeed again facing the problem of the ratio of non-performing loans (NPL). Therefore, one aspect related to the transmission of loan interest rate reduction is because it is a form of compensation from banks in order to maintain the condition of their NPL,” he explained.

As NPL rises, of course the bank needs to allocate reserves for higher credit. As for, launching from the money circulated (M2) published by BI, until July 2017 the average loan interest rate in banking reached 11.77 percent. Meanwhile, deposit rates in banks with tenors of 1, 6, 12 and 24 months respectively were recorded at 6.56 percent, 6.89 percent and 7.04 percent.

In August, the BI-7 days (reserves) repo rate was at 4.50 percent. Therefore, with the current condition and the economic prospects of Indonesia, the potential for fund-raising through the capital market still exists in the rest of the second semester. Although in the second quarter, our economic growth was only 5.01 percent, the government is still optimistic that it can be better in the third quarter and IV-2017.

According to an analyst at PT OSO Sekuritas Riska Afriani, this year is the right time for corporations and governments to raise funds, since low interest rates push investors to seek alternative instruments that can provide higher returns than deposits. Corporate bonds are also quite promising as an investment instrument. The average yield on corporate bonds since the beginning of the year, as indicated by the INDOBeX index, reached 10.74 percent.

The level of perception of emerging market investment risk, including Indonesia, is also getting better. This is reflected in the credit default swap (CDS) for five-year notes, which reached an all-time low of 96.008. The five-year CDS level fell by 39.19 percent year-to-date. This shows Indonesia’s economic fundamentals are currently strong.

Writing by Elisa Valenta, Email: elisa.valenta@theinsiderstories.com