Indonesian Rupiah Sovereign Bond Issue
    Category: Column By : Rainer Michael Preis Read : 758 Date : Friday, November 10, 2017 - 08:29:34

    This year so far has been one of U.S. dollar weakness. Many of President Trump’s policies are expected to further weigh on the dollar. In August, broad based U.S. dollar weakness started and in September earnestly accelerated. Several international banks have now raised their forecasts for Asian currencies, including the rupiah.

    Foreign investors, used to double-digit returns from Indonesian equities, are suddenly reducing equity exposure in favor of Indonesian bonds following a sovereign ratings upgrade and Bank Indonesia’s signal that it’s open to more rate cuts to spur growth. Overseas funds withdrew more than $2.3 billion from Indonesian equities in the past three months, while investing an additional $9.2 billion in the country’s bonds so far this year, the most since all of 2014.

    Indonesian stocks are expensive relative to historic benchmarks and Asia ex-Japan peers. Therefore, funds are flowing to Indonesia’s bonds, especially after the recent rate cut, while stocks have already risen significantly amid global and emerging markets equity rallies. Therefore Indonesia is now mulling issuing the nation’s first global sovereign bonds denominated in Indonesian rupiah.

    The Finance Ministry is in talks with the central bank to assess the potential impact of such an offer on the rupiah’s external value. The central bank is expected to gradually move away from using its bills and more toward using government bonds and treasury notes for its monetary operations. Foreign investment inflows into government bonds accelerated after Indonesia won a credit rating upgrade from Standard & Poor’s in May and a surprise interest rate cut last month has further boosted demand, driving yield on the benchmark 10-year securities to a four-year low of 6.47%.

    There’s a lot of merit in issuing global rupiah bonds, which will increase the investor base and increase the liquidity of the local bond market. Due to underlying strength in the economy, Indonesia’s growth consistently ranks among the highest globally, among the G20 and Asia and this in turn is helping to boost investment inflows. The Jokowi government’s success in keeping the budget deficit below a legally mandated limit of 3% of gross domestic product is further aiding fund inflows and is paving the way for a Global Rupiah Sovereign bond issue.

    The economy is expected to expand by 5.4% in 2018, the highest growth rate since 2013.  Bank Indonesia recently forecast 2018 Inflation at below 3.5%. There is now also a strong push by the Indonesian government to improve the investment environment for foreign investors. The government is trying out single-submission investment permit process on Jan. 1, and implement it by March 2018 at the latest. The initiative also plans to assign assistants to prospective investors on ministerial, national, provincial and city levels to ensure investment pledges are realized.

    The Philippines successfully sold global Philippine peso-denominated bonds in 2010, 2011 and 2012. Indonesia took more time to promote its bonds internationally in earnest but now the time is right as global investors increasingly are moving to “overweight” on Indonesian bonds. The Ministry of Finance has yet to reach an agreement with Bank Indonesia to set a timeframe for the rupiah Sovereign bond issuance, but it will transform capital markets for the better and be an important milestone for Indonesia.