Indonesia’s borrowing costs are surging toward those of Vietnam, rated five levels lower by Moody’s Investors Service, as a plunging rupiah spurs inflation

Indonesia Yield Nears Vietnam’s on Inflation Risk

By Bloomberg on 2:59 pm September 13, 2013.
Indonesia’s borrowing costs are surging toward those of Vietnam, rated five levels lower by Moody’s Investors Service, as a plunging rupiah spurs inflation. The extra yield investors demand to hold Vietnam’s 10-year local-currency government bonds over Indonesia’s narrowed five percentage points from this year’s high on Jan. 7 to a record low 12 basis points this week. The yield on the Indonesian notes has risen 3.3 percentage points to 8.49 percent in 2013 and Standard Chartered says it will reach 9.25 percent by Sept. 30. The rate on the Vietnamese paper dropped 110 to 9.1 percent.Indonesian inflation accelerated for a third month in August to 8.79 percent, belying Finance Minister Chatib Basri’s assurance that it would peak in July following a fuel-price increase the previous month. The central bank’s 1.5 percentage points of interest-rate increases over the last three months have failed to contain a 13 percent plunge in the rupiah this quarter, boosting the cost of imported goods.

“We’re underweight Indonesia’s local bonds and currency,” Pierre-Yves Bareau, head of global emerging-market debt in London at JPMorgan Asset Management, which oversees $1.5 trillion, said in an interview in Singapore yesterday. “Right now we remain cautious. We haven’t seen the administration moving in the right direction on reforms.”

Surprise increase     

Indonesia’s central bank raised the reference rate by 25 basis points to 7.25 percent yesterday, a move predicted by just four of 23 economists surveyed by Bloomberg. Sixteen forecast a hold, while three were expecting a 50 basis point increase. The 10-year yield will rise to 9 percent by the end of the year, according to HSBC Holdings, while Standard Chartered sees it at 8.75 percent.

The rate on Vietnam’s similar-maturity securities will be 9 percent by Dec. 31, according to Viet Capital Securities while Saigon Securities forecasts 9 percent to 9.1 percent and Nam Viet Commercial Joint-Stock Bank projects 9.2 percent.

Vietnam devalued its currency for the first time since 2011 in June to help spur exports and economic growth. Moody’s rates Vietnam at B2, the fifth highest junk level, while it assigns Indonesia its lowest investment-grade ranking of Baa2.

“Most holders of these notes are local investors,” said Pham Tri Hieu, deputy head of the money-market trading desk at Nam Viet Commercial in Ho Chi Minh City.

Default swaps     

Indonesia’s inflation in August was the fastest since January 2009. Bank Indonesia expects consumer-price gains to reach 9 percent to 9.8 percent by the end of the year, while Bank of America Merrill Lynch sees them peaking as high as 10.5 percent in December or January.

“Indonesia is perhaps a market where we would be happy to sit on the sidelines for the moment,” Geoffrey Lunt, a senior product specialist for fixed income in Hong Kong at HSBC Global Asset Management, which oversees $413 billion, said in an interview in Singapore yesterday.

The cost of insuring Indonesia’s bonds against non-payment using five-year credit-default swaps rose 104 basis points this year to 240, according to data provider CMA. That compares with increases of 71 basis points to 283 for Vietnam, 0.44 percentage point to 121 in Malaysia, 29 basis points to 124 in Thailand and 0.15 percentage point to 121 in the Philippines.

Indonesia sold $1.5 billion of five-year global Islamic securities this week at 6.125 percent, the most expensive rate for dollar-denominated debt since 2009.

Geopolitical stability     

The Indonesian 10-year local-currency yield is more than double that of Malaysia and the Philippines and almost twice as high as Thailand’s. Only securities issued by India, Pakistan, Brazil and Turkey offer higher rates among 23 emerging-market sovereigns tracked by Bloomberg.

“Vietnam is a frontier market, while there are few emerging-market countries with a stable geopolitical situation that offer yields as high as Indonesia,” Ezra Nazula, head of fixed-income at Manulife Asset Management Indonesia, which oversees Rp 25 trillion, said in a Sept. 11 interview in Jakarta. “The key issue is the currency, and once it stabilizes, investors can begin to see value in the yields.”

Iran’s rial, Syria’s pound and Mongolia’s tugrik are the only exchange rates that have fared worse than the rupiah this quarter, among around 170 currencies tracked by Bloomberg. Malaysia’s ringgit dropped 4 percent over the period, Thailand’s baht fell 2.5 percent, the Philippine peso declined 1.8 percent, while Vietnam’s dong strengthened 0.4 percent.

Indonesia’s trade deficit surged to a record $2.3 billion in July, while the current-account shortfall widened to $9.8 billion in the second quarter, the largest in data compiled by Bloomberg going back to 1989.

Fragile five   

Along with Brazil, India, Turkey and South Africa, Indonesia has been dubbed one of the “fragile five” emerging- market economies by Morgan Stanley. The lender said in a research note this week that it remained bearish on the rupiah and expected the currency to move closer to its “fair-value” of around 12,200 per dollar by the end of next year. The currency touched 11,525 yesterday, the weakest since April 2009, and traded at 11,443 as of 1:51 p.m. in Jakarta, according to prices from local banks.

In an attempt to narrow the shortfall in the current account, Indonesia’s government announced last month that it would ease mineral-export quotas, introduce a simpler process for getting investment permits and raise taxes on luxury imports. A weaker rupiah supports an increase in exports and a decrease in inward shipments, in the process of helping adjust the shortfall in the broadest measure of trade, Bank Indonesia said in a statement yesterday.

“Turning around Indonesia’s current-account deficit will be a long process,” Desmond Soon, portfolio manager at Western Asset Management , which oversaw $436 billion globally in June, said in a Sept. 10 interview from Singapore. “In this climate, whereby markets are focused on countries with twin deficits, the markets may not grant the authorities the luxury of time.”