The nation issued the seven-year notes at 2.976 percent, or 195 basis points above the euro mid-swap rate, the finance ministry said in an e-mailed statement today. That compares with the 4.032 percent secondary-market yield on Indonesia’s similar-maturity sovereign dollar securities, data compiled by Bloomberg show. The sale attracted 6.7 billion euros of bids, the ministry said in the statement.
Indonesia, which holds a presidential election on July 9, needs to sell a record amount of debt this year to fund a fiscal deficit target of 2.4 percent of gross domestic product, which was increased from 1.69 percent last month. The European Central Bank cut its benchmark interest rate to a record-low 0.15 percent on June 5 and introduced negative deposit rates. The euro sale was aimed at reducing reliance on dollar bonds as the U.S. cuts stimulus, Indonesian authorities said in January.
“Indonesia successfully opened a new market for itself,” Yudistira Slamet, head of fixed-income research at PT Danareksa Sekuritas, one of the selling agents, said in interview in Jakarta today. “Indonesia locked in a relatively low yield, compared with its existing bonds, while European investors won an attractive rate.”
Portugal’s euro bonds due April 2021, rated two levels lower than Indonesia by Moody’s Investors Service, yielded 3.023 percent yesterday, data compiled by Bloomberg show.
The premium investors demand to hold 10-year Treasuries over similar-maturity euro mid-swaps surged to a record high of 1.14 percentage points, compared with 0.87 percentage point at the end of last year, according to data compiled by Bloomberg.
“It’s smart of Indonesia to tap the euro market now as the ECB’s easing bodes well for demand,” Ezra Nazula, head of fixed income at PT Manulife Aset Manajemen Indonesia in Jakarta, who oversees about 24 trillion rupiah ($2 billion) of assets, said yesterday. “The trend for dollar yields is up, while euro yields should remain low. This is the government’s way of responding to this.”
Indonesia sold 24 percent of the euro bonds to investors in the U.K., 19 percent to those in Germany and Austria, 4 percent to Switzerland, 18 percent to the U.S., 24 percent to Asia and the rest to other European funds, according to today’s statement. Some 65 percent of the debt was sold to asset managers, 15 percent to lenders, 12 percent to central banks and 8 percent to insurance and pension funds.
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, according to data compiled by Bloomberg.
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 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 sale comes as Chile’s Codelco, the world’s largest copper producer, also tapped the euro debt market. The company sold 600 million euros of 10-year notes at 2.397 percent, the state-owned miner said in a statement yesterday.
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 yield on the debt due 2024 has dropped 1.45 percentage points since the offer to 4.50 percent, data compiled by Bloomberg show.
The country’s global bonds have returned 10.3 percent this year, the best performance after Pakistan among 12 Asian emerging market indexes compiled by HSBC Holdings Plc.
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 yesterday, 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,” Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore, said yesterday. “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 government hired Bank of America Corp., Citigroup Inc. and Deutsche Bank to manage the euro bond sale, the debt office’s Pakpahan said June 12.