Bloomberg News

Indonesian Bonds Go From Region’s Worst to Best: Southeast Asia

August 12, 2012

Indonesian bonds have gone from the worst to best performers in Asia this quarter as a more stable rupiah lured funds such as HSBC Global Asset Management and Pioneer Investments to Southeast Asia’s highest yields.

Local-currency notes have gained 4.1 percent since June 30 after being the only debt from the 10 major Asian emerging markets to post a negative return in the second quarter, according to an HSBC Holdings Plc index. Their average yield of 6.2 percent is the highest in Southeast Asia and compares with 5.2 percent in the Philippines and 3.5 percent in Malaysia.

The rupiah weakened 2.8 percent against the dollar in the second quarter as Indonesia posted trade deficits in each of the three months, the first shortfall since July 2010. Since then, the currency has lost just 0.6 percent and foreign funds have added 13.7 trillion rupiah ($1.4 billion) to their debt holdings, finance ministry data show. The more stable rupiah is helping to revive interest in the country’s notes, said Gordon Rodrigues, investment director at HSBC Global in Hong Kong.

“We are cautiously positive on Indonesia,” Rodrigues, who helps oversee $32 billion of Asian fixed-income assets, said in an interview on Aug. 7. “In a more stable environment for bonds, being underweight for a long period of time on Indonesia, which is a relatively high-yielding country, tends to hurt you.”

Cooling inflation and slower economic growth in Asia may prompt regional policy makers to reduce interest rates further, supporting gains in debt from the region. The GBI-EM Global Diversified Index of developing-nation bonds returned 8.6 percent this year, exceeding 2011’s 8.4 percent gain, according to JPMorgan Chase & Co., which compiles the data.

Fast Growth

Southeast Asia’s largest economy expanded 6.37 percent in the second quarter from a year earlier, official data show, more than the 6.10 percent forecast by analysts and the 6.32 percent in the previous three months. That was the fastest growth among the Group of 20 nations after China. Consumer prices rose 4.56 percent in July from a year earlier, within the central bank’s 3.5 percent to 5.5 percent target range for 2012.

Bank Indonesia kept its reference rate at a record low of 5.75 percent for a sixth month on Aug. 9, a decision predicted by 25 of 26 economists surveyed by Bloomberg. The policy rate will probably be left unchanged for the rest of the year, according to a Goldman Sachs Group Inc. research note by analysts Mark Tan and Hui Ying Chan released after the decision.

The central bank has intervened repeatedly to support the rupiah this year as the faltering global economy prompted investors to reduce holdings of emerging-market assets. The rupiah traded at 9,485 per dollar as of 8:13 a.m. in. The nation’s foreign-exchange reserves dropped almost 15 percent to $106.6 billion at the end of July from a record-high of $124.6 billion on Aug. 31, 2011, central bank data show.

Spread to Narrow

Foreign funds pulled $1.3 billion from Indonesian stocks and bonds in May, as the 12-month non-deliverable forward reached the highest level since September 2009 on May 25. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. The central bank started offering dollar term deposits in June to ease the pressure on the rupiah.

HSBC Global is rebuilding its Indonesian bond holdings, while hedging the currency, as “we would like to see stability in the way the exchange rate is managed,” Rodrigues said.

Pioneer Investments, which oversees 154 billion euros ($189 billion) of assets, said it favors longer-dated Indonesia debt and that it expects purchases by foreign investors to narrow the difference in yield between short- and long-tenor securities, the so-called bull flattening pattern. The gap between the two- and 10-year yield shrank to 56 basis points on Aug. 6, the least since January 2009, according to data compiled by Bloomberg.

Full-Year Deficit

“We think there’s some value at the mid to long-end part of the yield,” Hakan Aksoy, the London-based global emerging markets and high yield portfolio manager at Pioneer, said in an Aug. 7 interview. “But we remain cautious of foreign-exchange risks” as the rupiah may remain volatile, he said.

Indonesia posted a trade deficit of $1.3 billion in June, following shortfalls of $207 million in May and $765 million in April, official data show. Exports fell 16.4 percent in June, while imports rose 10.7 percent. The country will probably have a full-year trade deficit of $3 billion this year, Tim Condon, chief Asia economist at ING Groep NV in Singapore, wrote in a report on Aug. 3. That would be the first full-year deficit since Bloomberg began tracking the data in 2008.

Edwin Gutierrez, who helps oversee about $8.5 billion of emerging-market notes as a portfolio manager at Aberdeen Asset Management Plc, said he would avoid Indonesian securities as the strong import growth could weaken the rupiah further.

‘Better Places’

“There are better places for me to put my money where I don’t have the same currency concerns due to the weakening balance of payments,” London-based Gutierrez wrote in an e-mail on Aug. 6.

The worsening trade shortfall is a consequence of increasing levels of foreign investment which necessitate imports for large projects, Luky Alfirman, director of macroeconomic policy at Indonesia’s finance ministry, said in Singapore on Aug. 3. There was $4.6 billion of foreign direct investment in Indonesia in the first quarter, the most since the second quarter of 2011, according to government data. The current-account deficit, the broadest measure of trade, widened to $6.9 billion in the three months through June from $2.9 billion in the previous quarter.

‘Silver Lining’

The central bank said Aug. 10 it is taking steps to reduce the country’s rising current-account deficit, including giving foreign investors the flexibility to hedge foreign-exchange transactions to as short as one week. Policy makers also raised the floor of the money-market rate by 25 basis points to 4 percent to help strengthen the rupiah against the dollar.

“The silver lining is a more investment-driven current- account deficit,” HSBC’s Rodrigues said. “If the trend continues toward more investment rather than consumption, then that would be a positive” for the rupiah in the medium term as it would boost the nation’s productive capacity, he said.

Bank Indonesia said on Aug. 9 that it expected the economy to expand 6.1 percent to 6.5 percent in 2012 and 6.3 percent to 6.7 percent in 2013, supported by domestic consumption and foreign investment. Gross domestic product increased 6.46 percent last year, official data show.

Albert Ma, a Taipei-based bond fund manager at PineBridge Investments LLC, which oversees $67 billion of assets worldwide, said he prefers Indonesian debt among Asian local-currency notes.

“Overall, we still like the growth story,” Ma said in an interview on Aug. 6. “Together with tamed inflation, the bonds should continue to do well.”

‘Great Credit Story’

Credit-default swaps on five-year Indonesian government debt slid 48 basis points this year to 161 on Aug. 10, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities should the issuer fail to adhere to debt agreements. A basis point equals $1,000 annually in a contract protecting $10 million of debt.

Indonesia regained investment-grade rankings from Fitch Ratings in December, followed by Moody’s Investors Service in January, with both companies citing the country’s strong and resilient economic growth. Standard & Poor’s assigns Indonesia its highest junk level.

“The prevailing hunt for yield which investors seek at the moment within emerging markets, plus a great credit story, makes Indonesia one of the best places to be,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market debt as a senior portfolio manager at Union Investment Privatfonds in Frankfurt, said in an Aug. 3 interview.

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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