Overseas Investors Spurn Indonesian Debt

Overseas Investors Spurn Indonesian Debt

By Yudith Ho, Kyoungwha Kim & Liau Y-Sing on 4:16 pm December 28, 2013.
Jakarta/Singapore/Kuala Lumpur. Indonesia’s elections and current account deficit are deterring Western Asset Management and PineBridge Investments from snapping up 2013’s worst-performing developing nation bonds.The debt slid 13.4 percent this year, more than three times the 4.4 percent loss on Asia’s local-currency sovereign notes, according to Bloomberg indexes. The yield on 10-year rupiah government notes surged 3.24 percentage points to 8.43 percent, the worst year in data going back to 2003.

President Susilo Bambang Yudhoyono’s term ends next year as the nation tries to narrow the current account deficit from 3.8 percent of gross domestic product, Southeast Asia’s largest. The shortfall has sent the rupiah plunging more than 20 percent this year even as the central bank boosts the benchmark interest rate by the most since 2005 to 7.5 percent. That will damp economic growth to 5.3 percent next year, which would be the least since 2009, according to the World Bank.

“I don’t see a recovery,” Desmond Soon, Singapore-based fund manager at Western Asset, which oversaw $443 billion globally in September, said. “A quick turnaround in the current account is quite unlikely. There are some election uncertainties as well next year.”

Indonesians will choose a new president in July as Yudhoyono can’t run for a third five-year term, after he led the country to regain investment-grade rankings from Fitch Ratings and Moody’s Investors Service last year, for the first time since the 1997-98 Asian financial crisis.

The country’s incoming leader faces inflation at near the highest in more than four years and the longest run of current- account deficits since 1997. Consumer-price gains slowed to 8.4 percent last month, compared with 8.8 percent in August, the fastest since January 2009.

Exports contracted for 18 straight months through September, before increasing 2.6 percent in October, pressuring a current account in deficit for an eighth quarter. Bank Indonesia seeks to narrow the gap to below 3 percent of GDP next year, still exceeding the 0.25 percent to 2.5 percent range it deems sustainable.

“We remain cautious on rupiah bonds with the high inflation and current account deficit,” Ng Kheng Siang, head of Asia-Pacific fixed income at State Street Global Advisors, with more than $2.2 trillion of assets, said. “The start of the Federal Reserve’s tapering would also lead to investor outflows.”

The US central bank said Dec. 18 it will reduce its monthly bond purchases to $75 billion in January from $85 billion, prompting the rupiah to drop to the weakest level in five years. Global funds pulled 20 trillion rupiah ($1.6 billion) from Indonesia’s debt in June after the Fed first said the previous month it may scale back its stimulus.

The yield on the nation’s 20-year bonds climbed 276 basis points, or 2.76 percentage points, this year to 9.02 percent, data compiled by Bloomberg show. It touched 9.36 percent on Sept. 9, the highest for debt of that maturity since March 2011. That compares with the 4.41 percent yield offered on similar Thai notes and 4.59 percent on Malaysian securities.

Mirae Asset Management is looking for the right time to buy back Indonesian bonds next year, Kim Jin Ha, a global fixed income fund manager in Seoul at the company, which oversees $59 billion, said. “Once we see double-digit yields on the long end of the curve, it will entice many investors, including us, to look at them again.”

The difference between growth in developed and developing economies will narrow, which suggests capital flows into industrialized markets will increase next year, Mitul Kotecha, global head of foreign-exchange strategy at Credit Agricole CIB in Hong Kong, wrote in a Dec. 23 note.

Southeast Asia’s largest economy will likely expand 5.4 percent in 2014, less than an estimated 5.7 percent this year, according to the median estimate by economists surveyed by Bloomberg. That compares with the 2.6 percent growth forecast for the US, from an estimated 1.7 percent in 2013, and 3.5 percent for Singapore, stable from this year’s projection.

Bank Indonesia will maintain a tight policy stance to restore investor confidence by curbing inflation and reducing the current account deficit, senior deputy governor Mirza Adityaswara said Dec. 4, as the rupiah heads for its worst year since 2000.