A slumping currency and a surge in borrowing costs have put Indonesian firms in a tricky position. Until the economy recovers, local and global debt issuance is seen as being modest.
Recovery position
Source: REUTERS
Balinese Hindu devotees bathe in the Sebatu waterfall during a “Melukat” purification ritual in Gianyar District in the Indonesian island of Bali.
After bearing the brunt of a global emerging-market selloff in 2013, Indonesia is counting on moderating inflation and strengthening exports to kick-start South-East Asia’s largest economy.
Bankers, too, are hoping that political and economic headwinds will ease enough to allow issuers to carry out their financing plans.
Political uncertainty is likely to keep Indonesian issuers sidelined until the second half of the year at least, as companies await the outcome of parliamentary and presidential elections this spring. Until then, companies without urgent funding needs will turn to the loan market, especially since banks have ample liquidity.
“Most issuers we are speaking to prefer to borrow small amounts now and do the rest after the elections,” said a Jakarta-based DCM banker.
No one blames Indonesia for hoping a turnaround is at hand after a miserable 2013. Indonesia was among the hardest hit of global-emerging markets as investors fled amid fears of how these would fare once the US began withdrawing monetary stimulus from the global economy. The rupiah slid nearly 21% against the US dollar, prompting a 175bp hike in interest rates to paralyse local bond sales.
While no one expects a quick revival, the local bond market is expected to pick up pace in the second half simply because funding needs remain high. Corporations have Rp36trn (US$2.8bn) in bonds maturing this year, up from Rp25trn in 2013, according to Handy Yunianto, head of fixed-income research at Mandiri Sekuritas in Jakarta.
“Overall, we expect the pace of issuance in 2014 to be same as in 2013, when we did about Rp52trn, compared with Rp70trn in 2012.”
“Overall, we expect the pace of issuance in 2014 to be same as in 2013, when we did about Rp52trn, compared with Rp70trn in 2012,” Yunianto said.
Local companies will have to deal with a flood of supply from the government. A total of Rp360trn in both domestic and international government bonds is expected in 2014, Rp34trn more than 2013, also because of higher refinancing requirements.
However, there are some encouraging signs for Indonesia’s economy. Bank Indonesia expects inflation to slow from 8.0%-plus to 3.5%–5.5% in 2014.
One reason, say DCM bankers, is that interest rates are likely to remain stable after the central bank implemented several hikes last year. The rate increases caused the yield on the benchmark 10-year government bond to jump 300bp, resulting in a significant increase in funding costs for issuers.
Also, the effects of last June’s cuts in fuel subsidies, which wreaked havoc on the nation’s inflation rate last year, will have dissipated.
Indonesia also posted its third monthly trade surplus in December – its biggest in two years. The more positive trade figures are helping to narrow Indonesia’s current account deficit, which hit a record 4.4% of GDP in the second quarter last year.
Still, some analysts worry inflation may remain high and a mineral export ban from January may again weaken Indonesia’s trade position.
DCM bankers say they also do not expect Indonesian firms to be big issuers in the offshore bond markets this year as they are cautious about the rupiah’s direction this year.
“The general consensus is that the pipeline from Indonesia is not very strong. We’re having a few discussions, but the issuers are tending to take a backseat, rather than the investors, because of the rupiah depreciation in 2013,” said a DCM banker in Singapore.
Proactive approach
The Indonesian Government, however, took a proactive approach in achieving its dollar funding target this year, getting ahead of most of the US tapering programme to sell US$4bn in offshore dollar bonds on January 7.
The offering comprised 10- and 30-year bonds and completed 80%–90% of the sovereign’s offshore funding requirements for the year in one fell swoop.
The finaning did not come cheap. Indonesia had to pay up for the large deal size and the fact investors were skittish about buying Indonesian bonds because of the country’s still large current account deficit. Also, the price of Indonesia’s outstanding bonds had dropped as US Treasury yields went up, making investors wary of further falls.
Indonesia needs to raise Rp360trn through government bonds in 2014, Robert Pakpahan, director general of the debt management office, said in an interview late last year. The sovereign expected to raise 20% of this offshore, Pakpahan added.
However, the chances of Indonesia’s returning to the offshore dollar bond market are slim because it also plans to issue euro-denominated bonds, as well as a Samurai this year.
Only one corporation has braved the offshore bond markets so far this year, and its experience is unlikely to draw other issuers to the market.
Alam Sutera Realty raised US$225m through a five-year bond in late January. While the deal went smoothly, pricing with a yield flat to its own curve, it showed investors were not gung-ho about investing in Indonesian property just yet. Investors expressed wariness over Indonesia’s macroeconomic conditions, as well as various property cooling measures that the government implemented last year.
As Alam Sutera’s experience shows, confidence in Indonesia is returning at a lethargic pace.
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