The rupiah has lost 11.2 percent of its value against the greenback since the start of the year, and traded at 13,833 on Friday. (Antara Photo/Yudhi Mahatma)

Foreign Portfolio Investors Lose Faith in Indonesia’s Ability to Support the Rupiah


MARCH 04, 2015

Singapore. Foreign portfolio investors are showing signs of losing faith in Indonesia’s ability to support the rupiah, going by their lackluster interest in the latest government debt auction.

At Tuesday’s auction of bonds ranging in maturity from 3 months to 19 years, foreign investors picked up just about 10 percent of the Rp 10 trillion ($771.3 million) worth of total issuance, analysts at Maybank estimated.

That indicates a sharp drop in foreign appetite, given offshore investors bought bonds at a vigorous pace in the first two months of 2015.

According to ANZ, they picked up Rp 45.7 trillion worth of bonds via auctions and secondary market purchases, which amounted to 82 percent of net rupiah-denominated bonds issued in January-February.

The rupiah’s steady decline, along with the possibility it will fall further and faster, could be deterring foreign investors, analysts said, or it could mean that offshore investors heavily invested in Indonesian debt need a breather.

“Yields have moved lower, the currency is weakening and it’s not that they can keep on buying more bonds,” said Kumar Rachapudi, senior rates strategist at ANZ in Singapore.

Yet Rachapudi also sees enough value in Indonesian bonds, one of Asia’s highest-yielding markets, to keep foreign investors hooked, particularly given the increasing odds of more monetary easing by Bank Indonesia, which surprisingly cut the policy rate on Feb. 17.

Buying protection against a weakening rupiah is so expensive it would wipe out returns on the bonds, but there are ways to minimise currency exposure by investing less in longer tenor bonds, Rachapudi said.

Indonesian policymakers have gone to some lengths to convince market participants they stand ready to defend the rupiah, which is trading at its weakest levels since August 1998 — close to 13,000 per dollar — and is down 4.5 percent against the dollar this year.

“The 12,500 level is average for a year and it is possible that it will strengthen or weaken by 3 to 5 percent,” Bank Indonesia Governor Agus Martowardojo told reporters on Monday.

Senior deputy Governor Mirza Adityaswara has said the economy needs a competitive currency and yet, on a visit to Singapore this week, he assured bank analysts the central bank was committed to keeping the currency stable.

Not surprisingly, financial markets have their doubts, given the rupiah’s volatile history and the country’s heavy dependence on foreign portfolio flows.

Foreigners own about 40 percent of outstanding government bonds.

Forward rupiah markets are pricing a 7-to-8 percent depreciation in the currency against the dollar in 12 months.

Falling yields

Bond yields have also fallen far, with 10-year yields now at 6.9 percent or 140 basis points lower since mid-December.

One-year bonds yield 6.1 percent, while one-year rupiah bank deposits offer upwards of 8 percent.

Still, Indonesia’s bonds offer the highest yield after India in Asian fixed income markets and are more accessible than India’s.

The prospect of rate cuts makes them even more appealing for foreign investors who can lock in the “carry” from yields of 6-to-7 percent and then wait for capital gains as yields decline.

“Indonesian bonds make great sense from a total return perspective,” said Prashant Singh, managing director and a portfolio manager at Neuberger Berman.

“If you look at the carry, the potential for monetary easing and the macro backdrop, on a risk-reward basis it makes sense to be long Indonesian cash bonds,” he said.

Singh, like most other investors, advises some caution because of the pressures on the currency and therefore suggests going for medium-term bonds, albeit without a currency hedge.