Joko Wins Bond Market Money Over India

FEBRUARY 05, 2015

Jakarta. Indonesia’s debt sales are poised to decline through 2015, giving investors another reason to buy bonds that produced the best returns in Asia last year after India.

President Joko Widodo’s administration will reduce domestic issuance by as much as 18 percent this year as a cut in fuel subsidies to the nation of 254 million bolsters state coffers, according to HSBC.

PineBridge Investments said bond sales will drop as the nation’s fiscal deficit shrinks, even as the government provides for higher borrowings in a budget yet to be approved by the legislature.

The declining cost of oil imports, waning legislative opposition to Joko three months after he took office and the prospect of faster economic growth are combining to boost demand for Indonesian bonds, the best-performing local-currency debt in Asia this year.

Schroder Investment Management and AllianceBernstein expect returns to beat India’s.

“The supply dynamics will be favorable,” Rajeev De Mello, who manages about $10 billion as head of Asian fixed-income at Schroder in Singapore and has more Indonesian and Indian bonds than the benchmarks he uses to gauge performance, saidon Wednesday. “In the short term, perhaps Indonesia benefits more.”

Indonesia’s local bonds have handed investors a 7.6 percent return this year, compared with 2.9 percent on Philippine notes and 1.9 percent for Indian debt, Bloomberg indexes show.

India was the best performer in 2014 with a return of 17 percent, followed by Indonesia at 13 percent. A gauge of Asia’s developing economies advanced 7.8 percent.

Subsidies, deficits Joko scrapped gasoline subsidies and capped aid for diesel from Jan. 1 to free funds for development. India ended controls on diesel and raised natural gas prices in October. Central banks in both countries expect inflation to ease after oil prices declined to the lowest since 2009.

Indonesia aims to cut its budget deficit to 1.9 percent of gross domestic product this year from 2.3 percent in 2014.

India is targeting a 4.1 percent shortfall in the year ending March 2015 and 3.6 percent the following year.

Indonesia’s 10-year yield has dropped 102 basis points, or 1.02 percentage points, from this year’s high on Jan. 7 to 7.10 percent on Thursday.

That’s more than seven times the 15 basis point decline for similar Indian notes. The benchmark Indian yield slid 97 basis points in 2014 compared with a 66 basis point decline in Indonesia.

‘Most dramatic’ The impact has been “most dramatic” in Indonesia, where yields are reflecting the prospect of lower bond supply and inflation, Anthony Chan, a Hong Kong-based Asian sovereign strategist at AllianceBernstein said by phone on Monday.

Indonesia’s net issuance, which excludes sales to replace maturing debt, will drop to Rp 217 trillion ($17.2 billion) in 2015 from 265 trillion last year, HSBC analysts led by Andre de Silva in Hong Kong, estimated in a Jan. 19 report.

Joko’s administration said the same day it may borrow a net Rp 308.3 trillion this year, or 16 percent more than in 2014.

Targets proposed in the 2015 budget are yet to be finalized by legislature, and the Finance Ministry will decide on actual issuance, Robert Pakpahan, director general of the ministry’s debt management office, said on Wednesday.

Mandiri Sekuritas expects debt sales to increase as the government aims to inject funds into state enterprises tasked with improving infrastructure, Handy Yunianto, Jakarta-based head of fixed-income research at the unit of Indonesia’s biggest lender by assets.

However, it may take more time to get projects for building roads, ports and power plants going, De Mello said.

Bond inflows In 2013, Indonesia and India paid a price when global funds shunned assets of nations with large fiscal and trade imbalances. The rupiah slumped 21 percent and the rupee fell 11 percent. Both declined about 2 percent in 2014.

While the rupee has rebounded this year, the rupiah has extended its slide. Global investors increased their holdings of Indonesian bonds by $2.9 billion in 2015, and added a net $4.4 billion of Indian notes.

The differences may be explained by how subsidies and oil prices affect deficits in both countries.

Moody’s Investors Service estimates savings from fuel reforms amount to 2 percent of Indonesia’s GDP and 0.5 percent of India’s.

While both benefit from cheaper oil, the wider slump in global commodities reduces Indonesia’s earnings from exports such as coal and palm oil, senior vice president Atsi Sheth said in a Jan. 29 briefing.

Imports meet about 80 percent of India’s petroleum needs compared with 40 percent for Indonesia, which lost its net oil-exporter status as production dwindled.

“India and Indonesia rank very highly in our local currency framework,” said Anders Faergemann, a senior portfolio manager at PineBridge.

“Indonesia’s authorities have been quick to take advantage of the oil price adjustment and have shown a desire to eliminate a big chunk of the distortions in the budget from fuel subsidies.” Bloomberg

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