Aging Indonesia Oil Fields Risk Bond Supply Shock

Aging Indonesia Oil Fields Risk Bond Supply Shock

By Yudith Ho & Fitri Wulandari on 12:04 pm May 06, 2014

1.  Indonesia’s aging oil fields are swelling fuel-subsidy costs, prompting a unit of the nation’s largest bank to forecast the government will sell almost 40 percent more bonds than last year.

Mandiri Sekuritas sees authorities raising the 2014 debt sales target to as high as 450 trillion rupiah ($39 billion), from what was already a record goal of 362 trillion rupiah, in budget revisions set for this month.

The country, a net crude importer since 2009, will produce 804,000 barrels of oil a day this year, less than the official assumption of 870,000, regulator SKK Migas estimates.

Crude output has fallen more than 50 percent since the mid-1990s as a shifting regulatory framework deterred investors from developing new fields, while demand surged as millions of Indonesians bought their first cars.

Some 15 percent of this year’s budget has been set aside for fuel and electricity subsidies, and the chances of that spending being cut are hampered by 2014 being an election year.

“The market focus has shifted to a potential bond supply shock in the second half,” Wee-Khoon Chong, head of rates strategy for Asia ex-Japan at Nomura Holdings in Singapore, said in an April 30 interview. “Yields should drift higher.”

Sovereign rupiah notes have led gains in Asia this year, returning 6.2 percent and recouping almost half of their 13.3 percent loss in 2013, according to a Bloomberg index.

Indian securities, the next-best performers, have advanced 3.9 percent. Foreign-Currency Sales Indonesia’s economic growth slowed to 5.21 percent in the first quarter from a year earlier, the least since 2009, official data showed yesterday.

That adds to pressure to revise budget assumptions based on full-year growth of 6 percent and the rupiah averaging 10,500 per dollar this year, 12 percent stronger than the actual average of 11,730.

The 10-year Indonesian yield has fallen 49 basis points to 7.96 percent in 2014 as overseas investors pumped 52.63 trillion rupiah into local-currency debt, taking holdings to a record 376.28 trillion rupiah, finance ministry data show.

The country has already sold 205.5 trillion rupiah of bonds in 2014, 56 percent of its full-year target, including a $4 billion dollar-denominated sale in January.

Indonesia, which issued 322.7 trillion rupiah of debt last year, is also planning yen and euro offers this year, as well as a sale of US currency Islamic notes.

Fuel protests

The finance ministry’s debt management office is prepared for the 2014 budget deficit to be widened from the current 1.69 percent estimate, Robert Pakpahan, the office’s director general, said in a May 2 interview in Jakarta.

The government would take out loans and then boost the size of foreign-currency sales before selling more rupiah notes, he said.

“Foreign buying has kept yields low despite the frontloaded supply, but that might stop if fundamentals aren’t supportive,” Ezra Nazula, the head of fixed income at Manulife Aset Manajemen Indonesia, the local unit of Canada’s largest insurer, said in a May 2 interview in Jakarta. “The government has to cut fuel subsidies. If not this year then surely next year.”

Authorities in Southeast Asia’s largest economy raised the price of subsidized gasoline sold by state-owned oil company Pertamina from 4,500 rupiah a liter to 6,500 rupiah last year.

That compares with the 10,750 rupiah a liter that the local unit of Royal Dutch Shell sells Shell Super at, according to its website.

Last year’s increase caused protests in a country where riots helped oust the dictator Suharto in 1998.

Less flexibility

Standard & Poor’s, the only one of the three major rating companies that hasn’t restored Indonesia to investment grade, cited the country’s low per capita gross domestic product as it affirmed its BB+ ranking in an April 28 note.

“The income level also provides the government with less room to maneuver when maintaining creditworthiness would require unpopular polices,” S&P said in the note.

Indonesians voted for a new parliament last month and will go to the polls on July 9 to choose a new president.

The government has no plans to raise subsidized fuel prices and prefers to manage energy demand to keep the fiscal deficit below the 3 percent legal limit, Coordinating Minister for the Economy Hatta Rajasa said April 11.

Jakarta Governor Joko Widodo, the favorite in the presidential race, said in a May 3 interview on the campaign trail in East Java that fuel subsidies should be gradually reduced over the next four years and the funds diverted to help low-income people.

‘Growth ceiling’

The country’s oil output is set to drop to 500,000 barrels a day by 2020, just a quarter of the 2 million barrels of forecast consumption, which could push the nation into a “permanent energy crisis” if new fields aren’t developed, Deputy Energy Minister Susilo Siswoutomo said in March.

The cost of insuring Indonesia’s sovereign debt against default using five-year credit-default swaps has fallen 62 basis points to 171 this year, according to CMA.

That compares with drops of 10 basis points to 100 for Malaysian notes and 15 basis points to 99 in the Philippines.

The rupiah has strengthened 5.7 percent to 11,518 against the dollar in 2014, the best performance among Asia’s 11 most-traded currencies.

The nation will keep coming up against a “growth ceiling” if energy subsidies are maintained, because fuel imports will widen the current-account deficit whenever the economy expands faster than 6 percent, forcing a tightening of monetary policy, Leo Rinaldy, an economist at Mandiri Sekuritas in Jakarta, said in an interview yesterday.

The 450 trillion rupiah bond sale estimate was a worst-case scenario, he said.

“My hope is that the new government can really move forward with the subsidy reform to solve this issue once and for all,” said Rinaldy. “This doesn’t only mean a gradual cut in fuel subsidies, but also encouraging the supply of other energy alternatives in the future.”