Rupiah Leads Gains in Asia for Quarter as Bond Inflows Persist

  • Indonesia debt provides premium even after Fed rate increase
  • Central bank sees inflation slowing to 2.8% in December

Indonesia’s rupiah rallied in the fourth quarter in Asia’s best performance as overseas investors boosted holdings of the nation’s debt to a record.

The country’s 10-year bonds yield 8.75 percent compared with 2.30 percent for similar-maturity U.S. Treasuries, helping shore up demand even after the Federal Reserve raised borrowing costs in December for the first time in almost a decade. Inflation has also slowed to the least in a year, preserving the interest payments on Indonesian debt. The benchmark stock index rose to a five-week high on Thursday.

The rupiah advanced 6.3 percent for the quarter to 13,788 a dollar in Jakarta, according to prices from local banks compiled by Bloomberg. That pared its drop for 2015 to 10.2 percent, the worst in Asia after the Malaysian ringgit’s 19 percent loss. Indonesia’s currency is forecast to weaken a further 3.6 percent to 14,300 by the end of March, according to a Bloomberg survey.

“The Fed’s lift-off was taken by the market as some risk-friendly event," said Andy Ji, a foreign-exchange strategist in Singapore at Commonwealth Bank of Australia. “Indonesia’s rupiah is a high-yielding currency. It’s been underperforming so there’s a bit of catch-up in terms of performance."

Inflation Eases

Overseas funds boosted holdings of rupiah government bonds by 9.59 trillion rupiah ($695 million) to a record 558 trillion rupiah in December as of Dec. 29, Finance Ministry data show. The 10-year yield fell 86 basis points in the fourth quarter. Sovereign notes returned 2.9 percent in 2015, down from 2014’s 13 percent gain, according to a Bloomberg index.

Consumer prices increased 4.89 percent in November from a year earlier, the slowest pace since October 2014. They will ease to 2.8 percent in December, central bank Director Nanang Hendarsah said on Dec. 22.

The Jakarta Composite Index of stocks climbed 0.5 percent on Thursday, taking its gain in December to 3.3 percent. It still lost 12 percent in 2015 due to capital outflows in anticipation the U.S. would raise rates.

The rupiah declined for a fifth year, the longest stretch since 1998, as exports contracted for a 14th straight month through November amid a slump in commodity prices. Indonesia is the world’s biggest palm oil grower and thermal coal exporter.

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