Indonesia Bonds Complete Worst Week Since 2011; Rupiah Declines

Indonesia’s bonds completed their worst week since November 2011 and the rupiah declined on concern the Federal Reserve will taper its stimulus program, damping appetite for emerging-market assets.

Overseas investors pulled 17.3 trillion rupiah ($1.7 billion) from local-currency sovereign debt this month through June 18, poised for the biggest monthly outflow since September 2011, finance ministry data show. Indonesia may announce a decision on fuel-price increases tonight, which the government took into account when it raised its inflation estimate to 7.2 percent in the revised budget from 4.9 percent previously. Inflation has averaged 6 percent in the last six years.

“This global issue has a significant impact on Indonesian assets as the degree of freedom for investors to step in and out of the country is relatively high,” said Leo Rinaldy, an economist at PT Mandiri Sekuritas in Jakarta. “We will see the impact of the fuel-price hike on the rupiah after the external turbulence wanes.”

The yield on the 5.625 percent bonds due May 2023 climbed 48 basis points this week, the most since the five days ended Nov. 25, 2011, to 6.91 percent as of 4:22 p.m. in Jakarta, prices from the Inter Dealer Market Association show. The yield rose four basis points, or 0.04 percentage point, today and was at the highest since October 2011.

Bank Indonesia will give yields room to rise, after buying 1.2 trillion rupiah of government notes in the secondary market yesterday, Deputy Governor Perry Warjiyo told reporters in Jakarta today. The central bank is always ready to continue dual intervention until conditions have calmed, he said.

The Fed may curtail monthly bond purchases later this year and halt the program around mid-2014 if the economy performs in line with its projections, Chairman Ben S. Bernanke said this week.

Rupiah Drops

The cost of insuring Indonesian debt against default using five-year credit-default swaps rose 75 basis points this week to 267 yesterday, the highest level since October 2011, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Indonesia will announce a decision on fuel-price increases tonight, which will take effect at midnight, Energy and Mineral Resources Minister Jero Wacik told reporters today. The rise will reduce oil imports, improve the trade balance and boost the rupiah to meet the 2013 state budget assumption for an average rate of 9,600 per dollar, Finance Minister Chatib Basri said in a June 19 interview.

Foreign Investors

“The timing of this fuel-price hike is unfortunate as foreign investors are focused on sentiment rather than the structural improvement in Indonesia,” said Rinaldy, who forecast the rupiah will trade at 9,780 by the end of the year.

The rupiah declined for a sixth week, losing 0.6 percent to 9,930 per dollar, prices from local banks compiled by Bloomberg show. It traded at a 4 percent premium to one-month non-deliverable forwards, which slid 2.8 percent to 10,345, data compiled by Bloomberg show.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed 2.08 percentage points this week and 33 basis points today to 15.67 percent.