One-Way Street

With a small domestic bond market, net capital outflows are of greater concern for investors.

News that emerging-market capital outflows last year were even worse than the Institute of International Finance previously thought should be worrying investors in some Asian countries more than others. Like Indonesia.

The IIF now estimates total net capital outflows were $735 billion in 2015, up from $111 billion in 2014. Much of that was from China: The Washington-based institution put the leakage from the world's second-largest economy at $676 billion. While that's a big number, investors there have less to fear from the stampede than some elsewhere.

Annus Horribilis

Emerging-market net capital outflows were larger than previously thought at $735 billion

Source: Institute of International Finance

* Estimated ** Projected

That's because China still has enough money sloshing around to ensure its companies remain well funded, even if capital outflows spark a rise in domestic interest rates. It also has a booming onshore bond market, one that funded property developers alone to the tune of almost $70 billion last year.

Indonesia is a somewhat different story. According to data from Bank Indonesia, $1.5 billion of non-resident portfolio investment (investments made by a person not involved in the management of a company) flowed out of the country in the third quarter, compared with $6.3 million of inflows the previous quarter.

Indonesia also has a much smaller local-currency bond market. The stock of corporate bonds rose to 249.6 trillion rupiah ($17.9 billion) at the end of September, figures from the Asian Development Bank's AsianBondsOnline initiative show, and corporate securities account for less than 15 percent of the nation's total domestic market.

In China, by contrast, outstanding company bonds totaled 12.9 trillion yuan ($1.96 trillion) at the end of the third quarter. China also has more wiggle room than Indonesia in preventing capital outflows from turning into a credit crunch for its companies. For one thing, Beijing can extend its interest-rate cuts and lower banks' reserve requirements. Having already suffered a 30 percent drop in the rupiah against the dollar since the Fed began talking about tapering its asset purchases in May 2013, Indonesia's ability to ease monetary policy is limited.

Distressed Territory

Source: Bloomberg

Signs of strain are already evident. Berau Coal Energy failed to repay some of its dollar bonds last July, in Indonesia's biggest default of 2015. Notes of rival Indika Energy are also trading in distressed territory, while Trikomsel, which operates mobile-phone stores, is trying to avoid cross-defaults after missing a coupon payment in November.

Indonesian junk bonds were the third-worst performing in Asia last year, losing 1.7 percent, a Bank of America Merrill Lynch index shows. (High-yield notes in China returned 11.1 percent in 2015.) The spread over Treasuries that investors demand to own Indonesia's speculative-grade credit has almost doubled, widening to 913 basis points Wednesday, from 561 basis points at the start of 2015.

Negative Notes

Indonesian junk debt returns were the third-worst in Asia last year

Source: Bank of America Merrill Lynch

The IIF also named Indonesia as one of the countries with ``significant domestic financial vulnerabilities,'' including a large debt burden that may be challenging to finance in an environment of rising interest rates and falling currencies -- especially where much of those liabilities is denominated in dollars.

Emerging-market capital outflows aren't expected to improve greatly this year, and Standard & Poor's said earlier this week that the negative credit trend in Indonesia's corporate sector will probably persist. That's all the more reason for the IIF figures to alarm investors in this Southeast Asian nation more than anywhere else.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Katrina Nicholas in Singapore at

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    Paul Sillitoe at

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