Indonesia is embarking on massive infrastructure projects to help boost economic growth. (Antara Photo/Wahyu Putro A.)

Jokowi Spending to Ignite Corporate Debt Market


JANUARY 21, 2015

President Joko Widodo’s push to build roads, ports and power plants is set to expand Indonesia’s corporate bond market, which lags behind Southeast Asian peers.

State companies will fund infrastructure development via debt sales, as well as rights offerings and the government budget, Rini Soemarno, who heads the Ministry of State Owned Enterprises, said in a Jan. 16 interview in Jakarta.

Indo Premier Securities, the top corporate underwriter in 2014, and Mandiri Sekuritas predict company debt issuance will rise as much as 17 percent to Rp 55 trillion ($4.4 billion) in 2015.

Joko, who took office in October, plans to boost economic growth to 5.8 percent this year from an estimated 5.1 percent in 2014. Much of this will be driven by spending from state-owned companies including port operator Pelabuhan Indonesia II and electricity utility Perusahaan Listrik Negara.

An underwater telecommunications cable linking Java and Sumatra, as well as cement and fertilizer factories in Papua will be among projects to be started this year, Soemarno said.

“Regular issuers have already begun asking us about possible sales and some are requesting tender offers so we expect 2015 to be a good year,” Sonny Thendian, head of fixed income at Indo Premier, said in a Jan. 14 phone interview from Jakarta.

“Business confidence will improve now that the politics are out of the way and we enter a period of reform and policy implementation.”

Major projects Local-currency company debt sales fell 16 percent to a four-year low of Rp 47.1 trillion in 2014 as firms refrained from tapping the debt market during an election year.

Mandiri sees Rp 52 trillion to Rp 55 trillion of issuance in 2015, Indo Premier forecasts Rp 50 trillion to Rp 55 trillion rupiah and CIMB Group Holdings, the second-biggest arranger, predicts Rp 50 trillion to Rp 60 trillion.

Joko, known as Jokowi, scrapped gasoline subsidies from this month and capped aid for diesel. That will free up Rp 230 trillion in the 2015 budget, Finance Minister Bambang Brodjonegoro said Jan. 7. Infrastructure projects being prioritized include a trans-Java toll road linking Jakarta and Surabaya, power stations across the archipelago and ferronickel and bauxite processing plants, Minister Soemarno said.

Investments will also be made in toll roads, ports and rail lines in Sumatra, she said. “The biggest investment will be in electricity and transmission,” Soemarno said.

Probable sales State-owned construction companies including Waskita Karya, Wijaya Karya and Adhi Karya will probably go to the bond market to raise funds this year, Handy Yunianto, head of fixed-income research at Mandiri Sekuritas, said in a Jan. 19 phone interview from Jakarta.

Pelabuhan Indonesia II, which runs the country’s largest port in Jakarta, will sell $1 billion of dollar notes early this year, people familiar with the plan said last month.

“We are positive for state-owned enterprises bond issuance this year as the government plans to deliver its infrastructure development,” Anup Kumar, a fixed-income analyst at Bank Internasional Indonesia in Jakarta, said in a Jan. 17 interview. A significant recovery in total corporate issuance isn’t likely as investors will probably demand higher yields on concern U.S. rates will rise, he said.

The Federal Reserve will raise its benchmark interest rate to 1 percent by the end of this year, from the current zero to 0.25 percent level, according to the median estimate of 75 analysts surveyed by Bloomberg on Jan. 15.

Small market Indonesia’s corporate bond market is small by regional standards. It accounts for just 2.2 percent of gross domestic product, trailing 6 percent in the Philippines, 19 percent in Thailand and 42 percent in Malaysia, according to figures from the Asian Development Bank.

The high yields that companies must pay have deterred issuance. The average yield on the nation’s local-currency sovereign bonds, used as a benchmark to price corporate notes, is 7.80 percent, compared with 3.98 percent for Malaysian debt and 2.47 percent for Thai securities, JPMorgan & Chase indexes show.

“Local companies rely more on bank loans rather than bond markets as they’re unfamiliar with the capital markets,” Mandiri’s Yunianto said.

Bank Indonesia will give incentives for lenders to sell bonds to support credit growth, Juda Agung, executive director for monetary policy, said Jan. 15 without giving details.

Ambitious targets The government owns or controls 119 companies, which have combined assets of about Rp 4,500 trillion, Minister Soemarno said. Twenty are listed and account for more than a quarter of the market capitalization of the country’s stock exchange, according to official data.

Jokowi aims to accelerate economic growth to between 6.3 percent and 6.9 percent next year, and 6.8 percent to 7.4 percent in 2017, proposed revisions to the 2015 budget released yesterday show. The government forecasts inflation will slow to 3 percent to 5 percent this year, compared with 8.36 percent in December, which typically means lower bond yields.

“Prospects for lower inflation and interest rates are ideal for corporate funding this year,” Fakrizzaki Ghazali, a Kuala Lumpur-based credit strategist at RHB Research Institute, a unit of RHB Capital, said in a Jan. 16 e-mail interview.

“President Jokowi’s push for infrastructure and capital spending may see an uptick of offerings.”