Indonesia Bond Risk Drops Most Since 2011 as Fuel Price Raised

The cost of insuring Indonesia’s debt against default dropped by the most since October 2011 as the government raised subsidized fuel prices, reducing pressure on the budget and current-account deficits.

Five-year credit-default swaps on sovereign bonds fell 24 basis points to 243 on June 21 in New York, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That pared their gain this quarter to 80 basis points.

Gasoline and diesel prices were increased by 44 percent and 22 percent, respectively, Energy and Mineral Resources Minister Jero Wacik said late June 21. Indonesia’s credit rating may be raised if fuel reforms are finalized, Standard & Poor’s said in a May 2 statement as it cut the outlook to stable from positive.

“There is a likelihood that S&P may restore Indonesia’s outlook to positive after the fiscal improvement,” said Rully Nova, a currency analyst at PT Bank Himpunan Saudara 1906 in Jakarta. “Indonesia’s prospects are very positive now, but there are still external worries weighing on investor sentiment.”

S&P rates Indonesia at its highest junk level of BB+, the only one of the three major ratings companies not to assess the country as investment grade. The fuel-price increase is credit positive as it lowers subsidy costs and keeps the budget deficit below the legal limit of 3 percent, Moody’s Investors Service analysts led by Christian de Guzman in Singapore wrote in a report today.

Bonds Drop

The government predicted inflation will reach 7.2 percent in its revised state budget, from an initial estimate of 4.9 percent, because of the costlier fuel. Consumer prices rose 5.47 percent in May, official data show.

The yield on the 5.625 percent bonds due May 2023 rose 13 basis points, or 0.13 percentage point, to 7.08 percent as of 9:38 a.m. in Jakarta, the highest since October 2011, prices from the Inter Dealer Market Association show.

The fuel-price increase will reduce oil imports, improve the trade balance and boost the rupiah to meet the budget assumption for an average 2013 rate of 9,600 per dollar, Finance Minister Chatib Basri said in a June 19 interview.

The rupiah was little changed at 9,928 per dollar, prices from local banks compiled by Bloomberg show. It touched 9,958 on June 18, the weakest level since 2009.

The spot rate traded at a 4.2 percent premium to its one-month non-deliverable forwards, which gained 0.1 percent to 10,360, data compiled by Bloomberg show. One-month implied volatility in the rupiah, a measure of expected moves in the exchange rate used to price options, rose 39 basis points to 16.04 percent.

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