Indonesia: IDR bonds in a sweet spot


Positive catalysts support IDR bonds
Radhika Rao16 Sep 2021
    Photo credit: Unsplash Photo


    Positive catalysts continue to favour Indonesian bonds, as flagged earlier in IDR Rates: “Burden-sharing” a positive for IndoGB. These include (i) ebbing bond demand-supply uncertainty by a reduction in the size of the 2021 issuance, (ii) BI’s ‘burden-sharing’ arrangement for 2022 after active presence this year, (iii) excess domestic liquidity, and (iv) favourable externals i.e., softer US rates. These developments have allowed for a smaller weekly bond auction of IDR 21trn this week compared to IDR30-33trn earlier in the year. The government also raised US$ 1.23bn in 10y and maiden 40y bonds, with part of the proceeds to help repurchase existing bonds. Besides tapping current low rates, this fundraising exercise will also lengthen the maturity of outstanding debt at favourable costs. The tender offer to repurchase eight existing bonds (2022-2026) runs till Sep 17, according to the newswires. Concurrently, the debt office also sold debut EUR 500mn of sustainable bonds maturing in 2034, with proceeds to be channelled to eligible sustainability commitments. On the demand side, the income tax on bond interest for domestic investors stands lowered to 10%, on par with rates enjoyed by foreign investors, in an effort to draw more interest to the debt space. IDR 10Y yield (generic) holds near year’s low of 6.05-6.15% range.

     

    Fiscal slippage risks appear to be contained as the Jan-July fiscal deficit totalled IDR 336trn i.e., ~2% of GDP, with total revenues at 59% and expenditure at 50% of the full year budgeted targets respectively. Disbursements from the national recovery package (PEN) stood at 48% by end-August, in all raising the likelihood of keeping to the 2021 deficit target of -5.8% of GDP. Lastly, the record high trade surplus at $4.7bn in Aug will be a tailwind for the rupiah, given the boost to the current account math in the month. Exports benefited from the global upcycle in commodity prices, rising 64% y/y (oil & gas 78%, mining 163%), with yoy numbers also buoyed by base effects. Add to this, the drop in daily Covid case count to <10% of the peak is also expected to allow a gradual rollback in movement curbs. We remain constructive on IDR bonds, whilst keeping an eye on the evolving Covid situation, cautious comments from few rating agencies on the recent deficit financing plans and global financial conditions (particularly US rates and dollar) as the start of the US tapering nears.



    Radhika Rao

    Senior Economist – Eurozone, India, Indonesia
    radhikarao@dbs.com


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