Indonesia Weighs Debut Kangaroo Bond Sale on Yield Outlook

Indonesia is considering selling Kangaroo bonds for the first time next year as analysts predict Australia’s yield premium over Treasuries will narrow and its currency weaken.

“We are thinking of tapping this market, and issuing in the Australian dollar is a possibility,” Robert Pakpahan, director general at the debt management office, said in a July 5 interview in Jakarta. “We will be meeting with investors first to gauge what kind of demand there is.”

The extra yield investors demand to hold 10-year Australian government notes over similar-maturity Treasuries has fallen 30 basis points this year to 121 and is projected to reach 94 basis points by the end of 2014, according to Bloomberg surveys of analysts. Australia’s dollar, which has dropped 13 percent against the greenback since March, will weaken an additional 1.7 percent by the middle of next year, according to the median estimate in a separate survey.

Indonesia benefited from a 21 percent decline in the yen against the dollar since it sold Samurai bonds in November, reducing its interest payments, Pakpahan said. The country will boost the proportion of debt sales in foreign currencies to as high as 20 percent in 2013, from an earlier target of 15 percent, as it seeks to fund what is forecast to be its widest budget deficit on record without overcrowding the local market, he said.

Widening Spread

Southeast Asia’s largest economy sold $3 billion of dollar bonds in April, including $1.5 billion of 10-year debt at a record-low yield of 3.5 percent. The rate has since climbed to 5.09 percent, data compiled by Bloomberg show, as indications the Federal Reserve is preparing to scale back monetary stimulus drove global yields higher.

The premium investors demand to hold the 10-year notes over similar-maturity Treasuries has widened from 176 basis points at the sale to 220 basis points, and peaked at 274 basis points on June 24.

Indonesia would join Russia’s VTB Capital, Korea Gas Corp. and Zurich-based ABB Ltd., who have all tapped the Australian market for the first time in the past year. Sales of Australian dollar-denominated bonds sold by offshore borrowers, dubbed Kangaroo bonds, rose 11 percent so far in 2013 to A$14.1 billion ($12.9 billion), data compiled by Bloomberg show.

“Australian investors are looking for new names like Indonesia,” Roger Bridges, who helps oversee the equivalent of $22 billion as head of fixed income at Tyndall Investment Management Ltd., said in a July 5 interview from Sydney. “Appetite would depend on the spread,” as emerging-market yields have dropped a lot in recent years and are only now increasing, he said.

Asia’s Worst

Indonesia’s local-currency bonds and dollar-denominated notes both lost about 10 percent this year, the worst performances among Asia’s 10 biggest economies excluding Japan, HSBC Holdings Plc indexes show. Outstanding notes yield 8.05 percent, compared with 1.89 percent for U.S. sovereign debt and 5 percent for Australia, weighted averages show.

Indonesia predicts a budget deficit of 2.8 percent of gross domestic product this year, which would be the biggest in Bloomberg data going back to 2004. The shortfall was 1.5 percent in 2012. The national debt of $147 billion is equivalent to 25 percent of GDP, the lowest ratio in 12 Asian emerging-market economies tracked by Bloomberg.

Planned Sales

The Finance Ministry may sell as much as $3.6 billion more dollar bonds this year, Pakpahan said. It has previously announced it will offer $500 million of dollar-denominated debt onshore in October and that it is planning two global sales this half, one of which will be a sukuk issue. Pakpahan declined to comment on the timing and said the government is seeking clarity on when the Fed will rein in U.S. stimulus.

“Recent developments, with volatility in the emerging markets and the U.S., have made us realize that we shouldn’t reduce our options,” he said. “What we should do is sell in a currency when it is strong but weakening, which was what we saw happen last year to the yen.”

The drop in interest payments on Indonesia’s yen-denominated debt has probably exceeded the increase in the cost of servicing the nation’s dollar debt, caused by the rupiah declining 5.5 percent against the greenback in the past year, Pakpahan said. The government will consider selling Samurai bonds for the fourth time next year depending on market conditions, he said.

The nation has hired banks to manage its planned dollar-denominated bond and sukuk offers this half, and the Islamic sale is likely to be the smaller of the two, Pakpahan said. Deutsche Bank AG, Citigroup Inc. and Standard Chartered Plc will manage the Shariah-compliant offer, while JPMorgan Chase & Co., Barclays Plc and StanChart will arrange the non-Islamic sale, he said.

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