Indonesia Bonds Complete Worst Week Since August on Fuel Subsidy

Indonesia’s bonds fell this week, pushing the 10-year yield up by the most since August, and the rupiah declined on speculation the nation’s lack of progress in cutting fuel subsidies will spur outflows.

President Susilo Bambang Yudhoyono on April 30 made an increase in the gasoline price contingent on parliament approving a compensation package for the poor, which still hasn’t been submitted. The current-account shortfall narrowed to $5.27 billion last quarter, from $7.65 billion in the previous period, as the economy expanded by the least in more than two years, central bank data show.

“The current-account deficit narrowed for the wrong reason, which is slowing growth,” said Leo Rinaldy, a Jakarta-based economist at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets. “The market will punish Indonesia if it fails to hike fuel prices, which would improve the current account in a structural way and for the right reasons.”

The yield on sovereign notes due May 2023 climbed 14 basis points, or 0.14 percentage point, this week to 5.58 percent as of 4:15 p.m. in Jakarta, the most since the five days ended Aug. 31, prices from the Inter Dealer Market Association show. The rate gained three basis points today.

Pictet Asset Management and PT Manulife Asset Management Indonesia said this week they are bracing for declines in the nation’s bonds as elections next year limit the chance of the government increasing subsidized-fuel prices.

The rupiah fell 0.2 percent this week to 9,757 per dollar, the most since the five days ended April 5, prices from local banks compiled by Bloomberg show. It reached 9,845 earlier, the weakest level since Jan. 10, and advanced 0.4 percent today.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 54 basis points this week to 6.56 percent. It gained 15 basis points today and touched 7.21 percent earlier, the highest since Sept. 4, 2012.

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