Indonesia will be issuing a dollar-denominated bond for the first time to stimulate the flow of dollars through the veins of its economy as the country remains vigilant in controlling volatility in its local currency.
The Ministry of Finance’s debt management office said on November 29 that the size of the maiden issue may be as much as US$250 million and can be sold through either an offering period or auction in the first half of 2013. Prakriti Sofat, an economist for Barclays, estimates that the tenor can be in a range of 5-10 years as it may look to follow the example of the Philippines.
The Philippines kicked off a similar exercise after it issued its maiden onshore dollar bond worth US$500 million at a 2.75% coupon on November 28 that was four times oversubscribed. The proceeds will be used to pay off maturing foreign currency debt and help cut the amount of foreign-held debt to stabilise its bond market.
The diversification of the government’s investor base may also protect Indonesia against a massive sell-off of its government bonds during a financial crisis. But more importantly, the government may be getting the central bank to evenly distribute dollar availability in the banking system.
“In Indonesia’s banking system there is an uneven distribution of dollars, with some banks flush with dollars relative to others,” said Barclays’ Sofat. “The government plans to issue dollar bonds onshore to diversify funding instruments. The positive impact on reserves will support the willingness of the BI [Bank Indonesia] to intervene in spot FX market and help smooth demand and supply mismatches.”
Wider access to dollars is also important for Indonesian corporations, as the inability to get dollar funding can negatively affect the local currency.
“Dollar demand from corporate remains strong. Typically import demand comes through in the last two weeks of each month. If banks are short on dollars, then demand from corporations can create a scramble for the hard currency weighing on rupiah,” said Sofat.
Access to dollars is further challenged as it is cheaper to get dollars outside of Indonesia. An Indonesian corporation will need to pay as much as 300 basis points (bp) more if they were to access dollars by converting it from rupiah borrowed onshore, as opposed to raising it in the dollar bond market.
But only a limited number of companies have had access to the dollar bond market this year as a volatile rupiah and market uncertainty dampened the mood for issuers, according to Standard & Poor’s credit analyst Xavier Jean. For example, the rupiah has depreciated 5.7% against the dollar so far this year.
Another example of the difficulties that some of these companies face can be found in oil and gas company Energi Mega Persada. Its links to the troubled Bakrie conglomerate delayed its ability to refinance US$640 million in loans with US dollar bonds, according to a senior debt syndicate banker. Only US$11.2 billion worth of US dollar-denominated bonds were issued so far this year, according to data provider Dealogic.
Incentive to stay onshore
The Indonesian government has launched several initiatives to increase the amount of dollars in the country. It began selling dollar-denominated term deposits in June as part of a plan to require exporters to deposit their dollar earnings onshore.
Bank Indonesia said it attracted US$2.9 billion from the banking system in September, according to the Jakarta Post.
But exporters have typically sent their money overseas due to a lack of investment vehicles available in Indonesia. The government may be aiming at providing exporters with an incentive to keep their money in local bank deposits by issuing these dollar bonds.
“They may want to create investment opportunities for exporters who want to keep dollars but don’t want to bring them onshore,” said Erik Lueth, an economist at RBS. “The financial sector is not that deep, and there are not a lot of investment products in US dollars onshore. And that gap they be trying to fill.”
“Maybe exporters who know Indonesia are a bit more sticky than foreign buyers.”
Lueth explained that issuing dollar bonds will be helpful way to raise funds and help stabilise the currency without affecting inflation. If the government issued rupiah-denominated bonds, the increase in supply would weaken bond prices and raise interest rates.
“If it’s successful, I think Indonesia will try to build more of the curve and increase issuance because US$250 million is nothing, it’s probably going to be more buy-and-hold. It will be right for retail guys because there are some bank deposits in dollars and the return is much less so potentially you’ll get a pickup if you do the onshore dollar bond,” said a senior strategist based in Singapore.