Keep Indonesia’s Komodo bonds caged

Komodo bonds — offshore Indonesian rupiah bonds — are finally sputtering into life. This week, the second such deal by an Indonesian company has shown their potential. But don’t count your dragons before they hatch. The market will always be limited — and that’s a good thing.

  • By Morgan Davis
  • 23 Jan 2018
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Indonesian construction company Wijaya Karya’s Komodo bond follows a market-opener by toll road operator Jasa Marga in November, and a subsequent offshore rupiah sale from the Asian Development Bank. Jasa Marga and Wijaya Karya have raised the equivalent of about $700m between them — big transactions for a market that is still very new.

Offshore rupiah has limited liquidity.

There is little chance of offshore rupiah liquidity increasing dramatically. A look elsewhere brings that point home. China’s dim sum bond market was, for a time, the market of the future before it became a reminder of the past. India’s Masala bond market has offered some issuance. But if neither China nor India could make offshore issuance of local currency bonds a lasting feature of the international markets, Indonesia has no chance. Its economy is smaller than both, and its regional influence does not compare.

But that may be a good thing. A nimble, focused market would make the most of the potential of the market.

The Komodo transactions have so far fallen in line with Indonesian president Joko Widodo’s hopes for developing the country’s infrastructure. Both Jasa Marga and Wijaya Karya are government-owned. Other issuers in infrastructure and construction are also rumoured to be considering Komodo bond sales in the near future.

Indonesia has increased its infrastructure spending allocation in the state budget to 18.6% in 2017 from 8.7% in 2014, according to Moody’s. The 2018 budget also calls for a 6% year-on-year increase in infrastructure spending. But private money is desperately needed.

Enter the dragon. Tapping Komodo bonds will allow companies to bring in new sources of financing, potentially from investors with much more savvy than local funds when it comes to pricing infrastructure. Investors get a win because these deals often have a link to the government, they have a clear use of proceeds, and they offer a more friendly tax structure than onshore rupiah bonds. 

Targeting Komodo issuance to come from infrastructure-related credits will allow Indonesia to meet its building needs, while also preserving the pool of liquidity without asking too much of investors.

Although officials in Indonesia’s Ministry of Finance have been cautious about saying anything definitive on the new bonds, they do seem likely to issue their own Komodo. 

Issuance from the government would certainly boost the market’s credibility and appeal, but the sovereign needs to approach the market cautiously. Wijaya Karya’s $400m equivalent transaction is already large; an even bigger deal from the sovereign would suck too much liquidity out of the market.

While Komodo bonds are still in their infancy, the excitement around them is well deserved. But Indonesia must stay focused on developing the Komodo market with purpose and not push for a massive volume and number of deals for the sake of size alone. Success should be measured on the market’s purpose and impact.

After all, bigger isn’t always better. 

  • By Morgan Davis
  • 23 Jan 2018

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 China Merchants Securities Co 14.44
2 Industrial and Commercial Bank of China (ICBC) 11.65
3 Bank of China (BOC) 10.33
4 CITIC Securities 8.41
5 Agricultural Bank of China (ABC) 7.17

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1 CITIC Securities 1,849.35 10 10.27%
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1 HSBC 6,372.71 56 10.06%
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3 JPMorgan 4,198.06 25 6.63%
4 Deutsche Bank 2,675.58 22 4.22%
5 Goldman Sachs 2,631.39 16 4.15%

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