Diversification, flexibility and ambition. These are the buzzwords that best characterise Indonesia’s new international debt strategy. This year, the sovereign has overshadowed the Philippines, its arch rival in external bond markets, with successful transactions in dollar, yen and Islamic markets.
Indonesia was one of the first Asian sovereign borrowers to raise cash in dollar markets in February when it launched a $3bn bond, split equally between 2014 and 2019 tranches. This was the biggest Asian bond for seven years. The deal attracted $7bn in demand and with the five year and 10 year notes, yielding 10.5% and 11.75%, respectively.
The deal confirms the argument from debt capital market bankers who argue that international markets are open to high quality, flexible borrowers who are busy and transparent in their marketing pitch to investors.
The successful July re-election of market-friendly president Susilo Bambang Yudhoyono has generated global exuberance for the southeast Asian economy. Standard & Poor’s revised its outlook on Indonesia from stable to positive, citing the BB- rated borrower’s stable economic and political environment. Some investors have argued that Indonesia may achieve investment grade status in the next three to five years — if economic reforms continue.
Indonesia sold $4bn in the international markets in the beginning of the year — just as many emerging market issuers stayed under the cover. "We issued as much as possible given that the price was still tolerable," says Rahmat Waluyanto, head of the debt management office in Indonesia’s finance ministry. "This gave markets more confidence about our financing position and so in the second half of the year, we were able to issue in the domestic market at the pace we wanted," he says.
And in April Indonesia sold $650m of Islamic bonds in global markets — six months later than planned — and this was followed by a postponed Islamic bond auction in the domestic market later in the year. These developments highlight the correlation between conventional and Islamic markets in the global credit crunch. This may dampen hopes that countries can tap cash-rich Middle Eastern investors by issuing sukuk bonds at the expense of conventional debt issuance.
"The sukuk is still in early stages of development," says Waluyanto. In the 2009 fiscal year, around a quarter of Indonesia’s debt is in Islamic format. Waluyanto says this proportion will "gradually" grow in the longer term and says project finance Islamic bonds will enter centre stage in the asset class.
Turning Japanese
In July Indonesia diversified its funding further by diving into the Samurai bond market thanks to a guarantee from the Japan Bank for International Cooperation. But bankers and investors were disappointed with the ¥35bn ($372m) bond which is considered too small to act as a liquid benchmark. "We only took this amount because the opposition during the presidential elections politicised debt issuance and the government did not want to take on more debt," explains Waluyanto.
However, Samurai bond issuance, without a guarantee from a development bank, is unlikely to serve as an important source of funding for Indonesia after 2011 since Japanese institutional investors would snub investment grade products, he says.
In the 2009 fiscal year, Indonesia raised $10bn in the domestic bond market and $4.5bn internationally. Waluyanto says the country’s clean banks and abundant domestic liquidity suggests that local issuance will rise in the coming years.
Foreign investors held 5% of the local government bond market in 2003 and this has now jumped to 17.4%. "Even during the crisis, there was no significant reduction in holdings of local debt because many of the investors were hold-to-maturity accounts," says Waluyanto.
Indonesia has wisely boosted its funding diet with a menu of new products over the past two years. But is this a cyclical or a structural development? Will the country opt for a diversified currency debt structure in the long term? Or will Indonesia seek to denominate their bonds in local currency in the coming years — like several Latin American countries — in order to minimize exchange rate risks?
In comments that will cheer bankers, Waluyanto says Indonesia will stay active in global markets for balance-of-payment funding and liability purposes. "I want to maintain our presence in the international markets to create benchmarks, strengthen our foreign exchange reserves position and avoid crowding out of the private sector in the local market."