Deutsche Bank Upbeat on Indonesian Bonds, Praises Bold Action on Subsidies

JANUARY 12, 2015

Jakarta. Deutsche Bank is upbeat on the prospect of Indonesian bonds despite a weak outlook on the rupiah, thanks to fuel subsidy reform and improving macro-economic indicators.

The German lender said in a report dated Jan. 8 that bond yields appear to have “decoupled” from the rupiah depreciation in recent months.

“On the whole, bonds have held their ground even as the currency has weakened. To be sure, continued foreign exchange stress could eventually lead to capitulation from bond investors,” the Deutsche Bank Markets Research said.

Yield on the benchmark 10-year government bonds climbed to 7.856 percent on Monday from 7.796 percent on Dec. 31, according to Bloomberg data. It has climbed six basis point this year.

The government raised up to Rp 22.8 trillion ($1.8 billion) from a bond sale last week — double the Rp 12 trillion target, indicating high demand from investors.

It also raised another $4 billion from issuing dollar-denominated bonds last Friday, also met with strong demand.

Meanwhile, the Indonesia rupiah has weakened by 1.03 percent to 12,568 against the US dollar so far this year, data from Bank Indonesia shows.

“The pieces are slowly falling into place for Indonesia. Bold action on fuel subsidies and the fall in global oil prices should mean twin deficits compress and inflation undershoots,” Deutsche Bank analysts said in a report received by the Jakarta Globe on Monday.

“With the benefit of a lower deficit, the bond market will almost certainly be facing a more positive supply outlook this year.”

The government is estimated to gain as much as Rp 155 billion of fiscal space in the this year’s state budget, thanks to its fuel subsidy reform and the fall in global oil prices.

This is expected to trim the budget deficit to 1.9 percent of gross domestic product in the revised draft of the 2015 state budget, compared to 2.21 percent in the original version.

The bank also expects the rate of inflation in Indonesia to ease more than previously estimated this year due to the government’s recent cut back in fuel prices.

The Deutsche Bank analysts have estimated that the inflation rate could slow to under 7 percent in the coming months, before posting a sharper drop in the second half.

“This could make Bank Indonesia more comfortable with their policy stance, and arguably open up the possibility of easing rates down the year,” the report said.