BlackRock Inc. and Lombard Odier & Cie are shifting to Indonesian state-owned corporate dollar bonds, as a rally in Asia’s best-performing global sovereign debt runs out of steam before an election.
The extra yield investors demand to hold the finance ministry’s 5.875 percent U.S. currency notes due 2024 over Treasuries fell 101 basis points since the securities were issued Jan. 8 to 174. That compares with spreads of 237 and 239 basis points for similar-maturity bonds sold by Jakarta-based energy companies PT Pertamina and PT Perusahaan Gas Negara.
“We are more positive on the quasi-sovereigns because the spreads offer better value right now,” Neeraj Seth, head of Asian credit at BlackRock, which oversees $4.4 trillion, said in a June 6 interview in Singapore. The world’s largest asset manager has been cutting government dollar debt holdings this quarter as “a lot of good news is priced in and you do have some uncertainties,” he said.
Indonesia’s U.S. currency notes fell 0.1 percent in June, after gaining 11 percent in the previous five months, as the country reported the widest trade deficit since July and central bank Governor Agus Martowardojo warned the current-account shortfall could double to as much as 4 percent of gross domestic product this quarter. Voters are set to elect a new president on July 9, with polls suggesting a close contest as frontrunner Joko Widodo’s advantage narrows.
Widodo, who has been Jakarta governor since 2012, and the other contender, ex-army general Prabowo Subianto, have both pledged to reduce fuel subsidies and maintain a ban on the export of unprocessed mineral ores.
The winner will have to deal with a fragmented legislature voted for in April elections. Widodo’s Indonesian Democratic Party of Struggle has the largest number of seats at 19 percent. There are another nine parties that each control from 5 percent to 15 percent. That contrasts with India, where Narendra Modi’s Bharatiya Janata Party won the biggest parliamentary majority in 30 years last month.
Widodo “will probably not have the majority that Modi has in India,” Dhiraj Bajaj, the Hong Kong-based fixed-income portfolio manager at Lombard Odier, the oldest firm of private bankers in Geneva with $200 billion under management, said in a June 5 interview. “Instead of buying Indonesian sovereigns, we’ll probably buy Pertamina” as it provides a buffer against the risk of a lack of reforms, he said.
The yield on the oil company’s 4.3 percent dollar notes due May 2023 fell 138 basis points this year to 4.92 percent, while that on Perusahaan Gas Negara’s 5.125 percent securities due May 2024 declined 22 basis points to 5.03 percent since the debt was issued in mid-May. The yield on the sovereign paper maturing 2024 dropped 138 points since Jan. 8 to 4.35 percent.
The two companies have the same debt rating as the sovereign, which is ranked at the lowest investment grade by Moody’s Investors Service and Fitch Ratings and the highest junk level by Standard & Poor’s.
Indonesia’s trade shortfall was $1.96 billion in April, compared with the $178 million surplus forecast by economists surveyed by Bloomberg, the government reported June 2. The central bank’s prediction last week that the second-quarter current-account deficit could double from 2.1 percent in the first three months would see the gap approach the record 4.4 percent in the second quarter of 2013.
The country’s sovereign dollar bonds fell 0.8 percent in the three days after the release of the trade numbers, according to a HSBC Holdings Plc index. Their 11.4 percent gain this year still beats advances of 7 percent and 4.3 percent for Philippine and Malaysian securities, the HSBC gauges show.
Indonesian bonds will gain on increased certainty after the presidential vote regardless of who wins as Widodo and Prabowo have similar economic policies, according to Akbar Syarief, a fund manager at PT MNC Asset Management in Jakarta.
“Sovereign notes will benefit more than corporates from a rally following the election,” Syarief, who manages about $250 million, said in an interview yesterday. “There’s room for the 10-year sovereign yield to drop to about 4 percent after a smooth election, assuming the current-account deficit is within expectations.”
The cost of insuring Indonesian bonds for five years using credit-default swaps has fallen 97 basis points this year to 136, the lowest in a year, according to CMA. That compares with declines of 33 basis points to 82 for Philippine notes and 28 basis points to 82 for Malaysian securities.
Southeast Asia’s largest economy has a low level of government debt as a percentage of GDP compared with its regional peers. The 24 percent ratio is less than 46 percent in Thailand, 50 percent in the Philippines and 55 percent in Malaysia, according to data compiled by Bloomberg.
“You have still a sovereign with a debt-to-GDP that’s still relatively healthy and manageable and a trajectory that’s pretty good,” BlackRock’s Seth said. “I would rather have room to add than to actually have a big position going into the election.”