The nation is selling 1 billion euros ($1.4 billion) of seven-year securities, expected to be priced at 195 basis points above the euro mid-swap rate, said a person familiar with the transaction who asked not to be identified as the matter is private. The offer comes as Chile’s Codelco, the world’s largest copper producer, also taps the euro debt market, according to a person with knowledge of the deal.
Indonesia, which will hold a presidential election on July 9, needs to raise funds to finance a 2014 fiscal deficit targeted at 2.4 percent of gross domestic product, which was increased from 1.69 percent last month. The ECB cut its benchmark interest rate to a record-low 0.15 percent and introduced negative deposit rates on June 5, while the Federal Reserve has kept paring a bond-buying program that spurred fund flows to emerging markets.
“It’s smart of Indonesia to tap the euro market now as the ECB’s easing bodes well for demand,” said Ezra Nazula, head of fixed-income at PT Manulife Aset Manajemen Indonesia in Jakarta, who oversees about 24 trillion rupiah ($2 billion) of assets. “The trend for dollar yields is up, while euro yields should remain low. This is the government’s way of responding to this.”
The premium investors demand to hold 10-year U.S. Treasuries over similar-maturity euro mid-swaps surged to 1.13 percentage points today, compared with 0.87 percentage point at the end of last year, according to data compiled by Bloomberg.
Codelco expects to raise 600 million euros of 10-year notes at 93 basis points above the euro mid-swap rate, according to the person who asked not to be identified because they were not authorized to speak publicly about the deal. The company, owned by the Chilean government, is rated A1 at Moody’s Investors Service, five levels higher than Indonesia. The Indonesian premium has gone down from an earlier estimate of 225 basis points, suggesting strong demand for the offer.
Indonesia’s government sold $4 billion of 10- and 30-year dollar-denominated securities in January at yields of 5.95 percent and 6.85 percent.
The country’s global bonds have returned 10.2 percent this year, the best performance after Pakistan among 12 Asian emerging markets compiled by HSBC Holdings Plc. The yield on Indonesia’s 4.875 percent dollar securities due May 2021 has fallen 103 basis points, or 1.03 percentage points, this year to 4.02 percent, according to data compiled by Bloomberg.
Sovereign debt from Southeast Asia’s largest economy is rated at the lowest investment grade by Fitch Ratings and Moody’s, while Standard & Poor’s has kept it at the highest junk level. Fitch reaffirmed its rating in a statement today, saying it assumes an orderly presidential election next week when Indonesians head to polls to choose between non-active Jakarta Governor Joko Widodo and former army general Prabowo Subianto.
Some 56 percent of 70 investors surveyed by Deutsche Bank AG said they would sell the nation’s assets, while 13 percent would buy, should Prabowo win the election, according to a report dated June 9. A victory by Widodo would prompt 74 percent to buy and 6 percent to sell.
“The issuance would serve as a good barometer of how investors see Indonesia’s outlook this close to next week’s election,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “The choice of euro to fill the gap is not accidental of course.”
Indonesia’s economy expanded 5.21 percent in the first quarter from a year earlier, the slowest pace since the three months ended September 2009, official data show. Inflation (IDCPIY) eased to 6.7 percent in June, after staying above 7 percent since July 2013, while exports have declined in four of the first five months of the year.
The country has sold 249 trillion rupiah of debt in the first half of 2014, or 58 percent of a record gross issuance target of 423.7 trillion rupiah, data compiled by Bloomberg show. The finance ministry aimed to “frontload” bond sales in the first half to secure funding needs before the election, Robert Pakpahan, director general at the debt management office in Jakarta, said in January.
The government hired Bank of America Corp., Citigroup Inc. and Deutsche Bank AG to manage the euro bond sale, Pakpahan, said June 12. The nation intends to sell global Islamic bonds this year and is also considering a yen-denominated offer, he has said in the last two months. The euro-denominated sale is aimed at reducing Indonesia’s reliance on dollar debt as the Fed started to unwind its stimulus program, Pakpahan said in a Jan. 22 interview.