Indonesia is wary of the dangers of foreign fund flows out of its bond market, but can handle threat, its most senior debt management official has said.
The high proportion of foreign ownership of Indonesian rupiah government bonds, more than 30%, “basically reflects investors’ confidence on Indonesia’s long term economic fundamentals”, Rahmat Waluyanto, director general of debt management in the Ministry of Finance, told Emerging Markets.
“Yes, we are also very aware of potential reversal risk. But we are very ready to prevent such an event happening.”
Waluyanto’s confidence stems from the composition of foreign engagement in the markets, and the government’s policies.
“Most of those foreigners are ‘buy and hold’ or real money account investors, and are holding [bonds with long tenors],” he said, adding that 70% of foreign bond holdings are in maturities of five years or greater. “I’ve heard that many of those are Indonesian money kept in overseas accounts.”
In terms of policy, he believes a newly-established bond stabilization framework – which includes crisis management measures established with state owned financial companies and the central bank – will insulate the country from shocks. So will a steady deepening of the domestic bond market.
Waluyanto argued for Indonesia to be granted investment grade status by major credit rating agencies, all of whom have the country one rung below that level.
“Indonesia has already been perceived as having an investment grade rating by the market, as indicated by the CDS [credit default swap] rate and its bond price,” he said.
Japan’s credit rating agency gave Indonesia an investment grade rating two years ago. “We just need to convince the agencies such as S&P that we are able to manage inflation and to secure funding from domestic market sources.”
The battle with inflation was highlighted by all the international ratings agencies in their most recent upgrades. In March Standard & Poor’s said that high inflation and vulnerability to external shocks were key hurdles to overcome.
S&P credit analyst Agost Benard said, when announcing the March upgrade, that the positive outlook for Indonesia “reflects the likelihood of an upgrade if inflation is tamed while balance sheet improvements continue”.
Waluyanto said: “The investment grade rating is just within reach.” From his perspective, an upgrade would mean cheaper funding, the ability to attract more longer-term investment and more efficient infrastructure finance.
Improved sentiment towards Indonesia was evident in last week’s $2.5 billion ten-year sovereign bond issue, although Waluyanto said that a proportion three times larger than usual was allocated to domestic investors. “This is due to extra US dollar liquidity in the domestic market, as well as a result of heavy capital inflows,” he said.
Waluyanto also said Indonesia was making progress in developing its market for sukuks, the Islamic equivalent of a bond. He said his office was preparing two new types of sukuk: one using government projects as underlyings, and one to finance new infrastructure projects.