Indonesia's imperfect debt markets entice foreigners
Saturday, 16 January 2010
Indonesian rupiah bonds should maintain their allure for foreign investors this year, with high demand just as much a result of the economy's brightening outlook as of high yields that reflect its debt market's shortcomings.
Analysts say it may be hard to repeat last year's performance when returns of up to 22 percent on local currency government bonds, combined with the rupiah's 17 percent rise provided a windfall for foreigners.
But Indonesia's notoriously illiquid bond market and the price it is still paying for mishandling of past bouts of high inflation mean yields will stay well above those offered by its Asian peers and prove simply irresistible for many debt players.
"We expect local market funds to continue witnessing inflows this year," said Ashish Agrawal, a strategist at Bank of America Merrill Lynch. "Indonesian bonds are amongst the highest yielding in the region and will naturally attract inflows."
For example, 10-year bonds yield about 9.65 percent, similar to issues from Pakistan, rated 3 notches below Indonesia's Ba1 rating by Moody's Investors Service. In inflation adjusted terms, Indonesian bonds yield 7.1 percent, at least 5 percentage points more than Pakistan debt.
With the rupiah still seen poised for further gains, albeit not as spectacular as last year, HSBC estimates average dollar returns on rupiah bonds can reach 14.32 percent this year, much above those offered by any other Asian market.
Even if the central bank were to raise rates in 2010 and stand in the way of the rupiah's rise, investors see value in merely buying and holding these bonds until maturity.
"Even if Indonesian bonds don't rally more from these levels, it still remains an absolute investor haven because of its high yield," said Kenneth Akintewe, a fund manager at Aberdeen, who manages $500 million in assets.
The perceived difficulty with liquidating positions quickly, however, remains an issue and most foreign funds flow into short-term and liquid central bank bonds, or SBIs, often infusing more volatility into short end yields and the rupiah.
That means that at times of market turmoil, prices can swing wildly and spreads widen sharply.
For instance, as one analyst pointed out, at the height of the credit crisis in 2008, bond yields surged to 22 percent despite little evidence of selling by foreign funds. Bid-offer quotes can often be as wide as 10 basis points, he said.
Memories of the near 80 percent inflation during the Asian financial crisis a decade ago and double-digit price growth in 2005 and 2008 as well as doubts how quickly the central bank would respond to another spike also mean Indonesian debt comes at a discount.
The Philippines has public debt at around 60 percent of GDP, twice Indonesia's ratio, and yet keeps its 10-year yields near 8 percent, whereas Indonesian are closer to Argentina's, which has billions of dollars in unsettled bonds for the past eight years. -- Alibaba News Channel
Analysts say it may be hard to repeat last year's performance when returns of up to 22 percent on local currency government bonds, combined with the rupiah's 17 percent rise provided a windfall for foreigners.
But Indonesia's notoriously illiquid bond market and the price it is still paying for mishandling of past bouts of high inflation mean yields will stay well above those offered by its Asian peers and prove simply irresistible for many debt players.
"We expect local market funds to continue witnessing inflows this year," said Ashish Agrawal, a strategist at Bank of America Merrill Lynch. "Indonesian bonds are amongst the highest yielding in the region and will naturally attract inflows."
For example, 10-year bonds yield about 9.65 percent, similar to issues from Pakistan, rated 3 notches below Indonesia's Ba1 rating by Moody's Investors Service. In inflation adjusted terms, Indonesian bonds yield 7.1 percent, at least 5 percentage points more than Pakistan debt.
With the rupiah still seen poised for further gains, albeit not as spectacular as last year, HSBC estimates average dollar returns on rupiah bonds can reach 14.32 percent this year, much above those offered by any other Asian market.
Even if the central bank were to raise rates in 2010 and stand in the way of the rupiah's rise, investors see value in merely buying and holding these bonds until maturity.
"Even if Indonesian bonds don't rally more from these levels, it still remains an absolute investor haven because of its high yield," said Kenneth Akintewe, a fund manager at Aberdeen, who manages $500 million in assets.
The perceived difficulty with liquidating positions quickly, however, remains an issue and most foreign funds flow into short-term and liquid central bank bonds, or SBIs, often infusing more volatility into short end yields and the rupiah.
That means that at times of market turmoil, prices can swing wildly and spreads widen sharply.
For instance, as one analyst pointed out, at the height of the credit crisis in 2008, bond yields surged to 22 percent despite little evidence of selling by foreign funds. Bid-offer quotes can often be as wide as 10 basis points, he said.
Memories of the near 80 percent inflation during the Asian financial crisis a decade ago and double-digit price growth in 2005 and 2008 as well as doubts how quickly the central bank would respond to another spike also mean Indonesian debt comes at a discount.
The Philippines has public debt at around 60 percent of GDP, twice Indonesia's ratio, and yet keeps its 10-year yields near 8 percent, whereas Indonesian are closer to Argentina's, which has billions of dollars in unsettled bonds for the past eight years. -- Alibaba News Channel