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Derivatives

Indonesia braves markets to fund deficit

The Republic of Indonesia faces a challenging remainder of the year as it must borrow more from the international markets to fill a widening current account deficit at a time when tapering talk in the US and weakening fundamentals at home are making it more difficult to attract investors, writes Frances Yoon.

The Republic of Indonesia has always attracted a strong following for its multi-billion dollar bond issues, especially from US investors, ever since it began issuing them in 2004. But its ability to sell jumbo bonds could suffer as capital exits the country. 

The country has already faced challenges this year. It has issued a public dollar bond in the first quarter of every year since 2006 — except one, 2011. That routine was broken again this year, as concerns over rising US Treasury rates meant investors were demanding heftier premiums — and were becoming less keen on duration. 

But when the country finally pulled the trigger on April 8, it was rewarded with a massive order book. The combined $3bn that it sold across the 10 and 30 year tranches generated around $13bn of demand.

Lead managers Deutsche Bank, JP Morgan and Standard Chartered were able to convince investors of the continual growth story of the country, allowing them to tighten guidance from initial guidance of 3.625% and 4.95%, respectively, for the 10 year and 30 year tranches, all the way down to coupons of 3.5% and 4.75% by final pricing. Those levels were the tightest since Indonesia made its debut in the global markets a decade ago.

“If market conditions are favourable we can obtain debt at a lower cost of borrowing [in global markets] than our domestic issuance,” says Robert Pakpahan, director general at the Indonesian Ministry of Finance’s debt management department. “We carefully select favourable timings and issuance windows to acquire a better cost of borrowing.”

And timing has been important this year. International bond markets took a violent turn on May 22 when US Federal Reserve chairman Ben Bernanke mentioned for the first time that quantitative easing (QE) could begin to be reduced later in the year. Emerging markets saw a sudden flood of outflows, the scale of which had not been seen in years. Indonesia’s sovereign bonds took a beating. 

Unfortunately for the sovereign, it did not have the luxury of waiting for spreads to return to pre-Bernanke levels, especially as a widening current account deficit meant its funding needs were increasing. It still needed to issue at least $3bn more and by July it had less than half the year left in which to do so. 

It mustered the courage on July 10, becoming the first Asia ex-Japan issuer to launch a jumbo deal since global financial markets had been hit by QE concerns. To compensate for the fact that it was trying to raise 10 year money, it offered a hefty 50bp premium at launch. 

The book only reached $1.9bn for the $1bn deal and the sovereign was not able to tighten initial price guidance from 5.45%, but it did manage to lock in more attractive pricing compared to where rates are now. 

“One of the most important variables being looked at was certainly the projection and analysis of the US Treasury rate, which was predicted to be trending upward,” says Pakpahan. “The tapering issue emerged during the end of May and June, requiring the deal to be managed carefully in light of the July issuance. The yield on the Indonesia 2023s issued in July 2013 rose from 5.45% at the issuance date to 5.98% recently.”

The country is no stranger to launching sizeable long bonds in shaky markets. The sovereign was able to launch a $900m 10 year and a $600m 30 year on October 5, 2005, less than a week after bomb attacks in Bali. 

Rocky outlook

But deepening concerns over Indonesia’s widening current account deficit are causing foreign investors to think twice about buying the country’s assets — the currency was trading near a four year low of Rph11,335 against the dollar on September 2. To bolster confidence in the country’s economy and stability, the central bank raised interest rates by half a percentage point and extended a swap deal with the Bank of Japan on August 29.

The sovereign will face these challenges again when it tries to sell a $1.5bn-$2bn global dollar sukuk that is scheduled for later this year. With Bernanke set to provide more details on the gradual decrease of QE and investors increasingly seeking higher rated names in North Asia, Indonesia may struggle to garner the blockbuster demand it achieved back in April — a fact that it recognises.

“The challenges from global market volatility are the US economic recovery, which brings uncertainty about QE, potential massive capital outflows from the emerging markets, US dollar appreciation and uncertainty on fuel prices,” says Pakpahan.  

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