‘Tis the season to fund early
The Republic of Indonesia re-opened G3 sovereign bonds for emerging market issuers last week with a $3bn triple-trancher — the second December in a row that it has made an early start on its funding plans. While its timing has come under criticism from some market watchers, the country made a savvy move given the circumstances.
Indonesia typically likes to kick off the year with a bond issue taking advantage of abundant liquidity in January to get its funding off to a strong start.
It broke that pattern last year by pre-funding its 2016 budget in December, which proved to be a smart move as markets turned choppy in the first quarter. And this year, it replicated that strategy by selling a blockbuster bond last Thursday.
But while last year’s deal was hailed as a shrewd move, the reaction this time around has been more mixed.
For a start, the bond priced at a time when US Treasury yields had reached their highest levels in 2016, with three, five and 10 year yields spotted at 1.45%, 1.90% and 2.45%, respectively.
And it came in a week where markets were jittery ahead of a glut of market moving events. The last US job numbers before the next Federal Reserve meeting were schedule to be announced a day later. Italy was conducting a referendum on constitutional reform on the Sunday. The presidential election in Austria was also in the mix, with a win for far-right candidate Norbert Hofer seeming possible at the time.
As a result Indonesia had to pay up for its $3bn transaction. It offered around 40bp over its existing three year curve, and 25bp and 20bp over its outstanding five and 10 years respectively.
The pricing has led to criticism that the sovereign would have been better off waiting until the New Year, when it could potentially get away with lower premiums.
That may be the case but Indonesia is one of the most sophisticated borrowers in the region and decided that the certainty of funding now was a better bet than gambling on tomorrow.
For a country like Indonesia with around $10bn in offshore funding requirements annually, success does not need to be measured on deal-by deal basis, but over a longer period to time. And while it had to be generous with its latest outing, its decision to approach the market now was sensible.
This is because there will plenty of uncertainty globally as markets head into 2017. Donald Trump is taking office in the US in January, the UK is set to trigger its exit from the European Union in March and the two pillars of the EU — France and Germany — will elect new leaders next year, to name just a few events.
With all the looming political uncertainty, EM names will be one of the most vulnerable group of issuers if capital leaves for safe havens or if US growth continues and investors look for returns closer to home. Indonesia, as the biggest economy in southeast Asia by GDP, decided the risk was not worth taking.
By tapping the investors now, the country has paid for insurance policy of having some of its funding completed in case markets shut. And with a big pipeline of issuance lined up for the New Year, an added bonus is that Indonesia had investors’ full attention last week without competition.
Sure, markets may turn favourable for issuers in 2017 but if this year has shown anything it’s that markets have the ability to surprise for the worse. Indonesia was right to stick with its December tradition.