Key test looms f or Indonesian bonds

JAKARTA: Indonesia’s next bond sale in early June may go a long way to show whether demand from local banks cashed up by the central bank’s liquidity measures will be enough to offset the spectre of rising debt supply.

Local lenders have become the key buyers of the nation’s sovereign debt since the coronavirus crisis spurred foreign investors to cut their holdings amid a sell-off in emerging-market assets. With the government boosting spending to tackle the pandemic, the tug-of-war in Indonesia’s bond market will have critical long-term ramifications for the nation’s financial health.

The increase in government spending will probably see the budget deficit widen to 6.27% of gross domestic product this year, Finance Minister Sri Mulyani Indrawati said on Monday, just six weeks after the administration projected it would be 5.07%. The target before the pandemic was only 1.76%.

Average monthly issuance at debt sales may now climb to the top end of the finance ministry’s target range of 70 trillion rupiah (Us$4.8bil) to 90 trillion rupiah, said Jennifer Kusuma, senior rates strategist at Australia & New Zealand Banking Group Ltd in Singapore.

This is to accommodate the estimated 175 trillion rupiah in extra financing the government requires if it’s to be fully raised from the rupiah bond market based on the 6.27% of GDP target, she said.

Foreign funds haven’t been helping. They’ve cut their holdings to about 30% of total government debt outstanding, the lowest in eight years, from as high as 39% in January. Overseas investors are being deterred by risk aversion stemming from the virus outbreak, and also the relatively expensive rupiah hedging costs. The spread between one- and 12-month non-deliverable forwards remains close to 1,000 basis points.

While there are plenty of negatives, the central bank’s raft of measures to boost liquidity announced on April 14 have so far helped support the bond market. Among other steps, Bank Indonesia expanded its term-repo facility and cut the reserve ratio requirement for banks.

Benchmark 10-year yields have dropped to 7.54% from as high as 8.38% in the middle of March, according to data compiled by Bloomberg.

Bank Indonesia’s surprise decision on Tuesday to keep interest rates on hold can also be seen as a bond positive in that it helped preserve some of the yield premium on local debt. The move took on even greater significance Friday after the Reserve Bank of India unexpectedly cut its own benchmark by 40 basis points at an unscheduled meeting.

Indonesia’s most recent sale of conventional bonds on May 12 garnered total bids from investors of 72.7 trillion rupiah, the highest level in three months. — Bloomberg