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Indonesia Plans Euro, Yen Bond Sales to Meet Record Target

Indonesia Budget
A fisherman unloads fish for drying in Pangkal Pinang, Bangka Island, Indonesia. President-elect Joko Widodo wants to reduce fuel subsidies to free up funding to help farmers and fisherman and improve access to education and health care after he takes over in late October. Photographer: Dimas Ardian/Bloomberg

Indonesia plans to sell sovereign bonds denominated in dollars, euros and yen in 2015 to meet a gross issuance target 13 percent higher than this year.

The debt sales goal in next year’s draft budget will be 459 trillion rupiah ($39 billion), compared with 406.2 trillion rupiah in 2014, Robert Pakpahan, director-general at the Finance Ministry’s debt management office, said in an interview in Jakarta yesterday. Twenty percent of issuance will be in foreign currencies, the same proportion as this year, he said.

President Susilo Bambang Yudhoyono is currently discussing the proposed budget with his successor, Joko Widodo, who wants to reduce fuel subsidies to free up funding to help farmers and fisherman and improve access to education and health care after he takes over in late October. This year’s sales target is already a record and 23 percent higher than 2013.

“The challenge next year will be to issue enough bonds to cover our deficit without oversaturating the local or the global market,” Pakpahan said.

The Finance Ministry may “frontload” sales next year in anticipation of the Federal Reserve raising U.S. interest rates, he said. The median estimate of Fed policy makers released after their June meeting showed an increase to 1.13 percent from 0.25 percent by the end of 2015.

Euro Success

The government’s debut sale of seven-year euro bonds in July attracted bids for almost seven times the 1 billion euros ($1.3 billion) sold. The notes were auctioned at a yield of 2.976 percent, compared with the 4.032 percent secondary-market rate on the nation’s similar-maturity dollar debt, data compiled by Bloomberg show. The yield on the euro notes has since fallen to 2.58 percent, data compiled by Bloomberg show

“After the successful euro issuance this year, we think we will make it a regular event,” Pakpahan said.

The government is “a little concerned” by rising foreign ownership of local-currency debt, which reached a record-high 36.7 percent on Aug. 26, he said. Authorities see a budget deficit of 2.32 percent of gross domestic product in 2015, compared with a revised 2.4 percent this year.

“We’re happy that investors are interested in buying our bonds, but we would prefer if the proportion can be lower,” Pakpahan said.

Indonesia’s 10-year sovereign rupiah bonds yield almost four percentage points more than similar-maturity debt from the Philippines. The two countries are assigned the lowest investment-grade rankings by Moody’s Investors Service and Fitch Ratings.

Interest-Rate Differential

“Offering debt in different currencies widen the scope of investors that the government can reach, securing its financing plan,” said Angky Hendra, the Jakarta-based head of fixed income at PT Batavia Prosperindo Aset Manajemen, which oversees about 14 trillion rupiah. “Indonesia’s interest-rate differential should guard it against any reversal of fund flows.”

The Finance Ministry may hedge some of its yen-denominated notes against currency swings next year, after receiving the “green light” from the Supreme Audit Agency, Pakpahan said.

The rupiah plunged 21 percent against the dollar in 2013 and the yield on 10-year local-currency sovereign notes surged 3.26 percentage points. The Indonesia currency has rebounded 3.7 percent to 11,734 this year and the yield on the debt due in 10 years has fallen 24 basis points to 8.22 percent. The government paid the highest rate since 2009 when it sold dollar-denominated sukuk in September last year.

“We have some trauma from the bad situation in 2013,” Pakpahan said yesterday. “So this diversification strategy, selling euro bonds and Samurai bonds, even if the U.S. dollar market is still the biggest, can help us reduce our risk.”

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