Indonesia’s Bonds, Rupiah Fall This Week on S&P Rating Outlook

Indonesia’s 10-year bonds dropped this week by the most in three months and the rupiah fell after Standard & Poor’s cut its outlook on the nation’s credit rating.

The yield on the 5.625 percent notes due May 2023 climbed 11 basis points to 5.58 percent, the biggest increase since the five days ended Feb. 1, prices from the Inter Dealer Market Association show. It rose six basis points today. The rupiah declined 0.2 percent this week to 9,741 per dollar, including a

0.1 percent loss today, according to prices from local banks compiled by Bloomberg.

S&P changed the outlook on Indonesia’s debt rating to stable from positive yesterday, though maintained the grade at its highest junk level of BB+. Both Moody’s Investors Service and Fitch rate Southeast Asia’s largest economy the lowest investment grades.

“There were expectations for a rating upgrade this year and this revision takes that off the table,” said Suriyanto Chang, head of treasury at PT Bank QNB Kesawan in Jakarta. “The negative sentiment will only last a few more days before bonds begin rallying again as investors seek higher yields.”

The government delayed its plan to reduce fuel subsidies until after the budget is revised to include compensation programs for the poor, President Susilo Bambang Yudhoyono said April 30, indicating the revision is expected to come in May.

“The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months,” S&P said in a statement yesterday.

Currency Market

Overseas funds added 18 trillion rupiah ($1.8 billion) to their local debt holdings in April, finance ministry data show.

Indonesia’s policy and exchange-rate management need to focus on sending the right signals to the market so as not to cause portfolio outflows, S&P credit analyst Agost Benard said in a teleconference today.

Bank Indonesia has been intervening in the foreign-exchange market since yesterday afternoon until this morning, Deputy Governor Perry Warjiyo said in Jakarta today. In the context of its policies, the central bank’s focus is on rupiah stability, he said.

The rupiah’s one-month non-deliverable forwards traded 0.5 percent weaker than the onshore spot rate, having fallen 0.5 percent this week to 9,786 per dollar, according to data compiled by Bloomberg show.

A daily fixing used to settle the derivatives was set at 9,744 today by the Association of Banks in Singapore, compared with 9,720 on April 26. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped 12 basis points, or 0.12 percentage point, this week to

5.55 percent.

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