Indonesia Dollar Debt Gains as Rupiah Plummets: Southeast Asia

Indonesian dollar bonds are beating rupiah debt as investors seek to tap the country’s long-term growth potential without the risk of holding assets in the worst-performing emerging-market currency.

Global notes gained 7 percent since the start of September, after losing 18 percent in August in the worst performance since 2008, according to indexes compiled by HSBC Holdings Plc. That exceeded the 4.3 percent advance in local securities, which snapped a four-month decline. The rupiah fell for a seventh month in September, losing 5.7 percent, the most among 24 emerging-market currencies tracked by Bloomberg.

Kokusai Asset Management Co. says the dollar bonds will enable investors to cushion themselves against the rupiah, the most volatile currency in Asia, while UOB Asset Management Ltd. said it favors the foreign-currency notes. Inflation slowed last month from a three-year high in August and the country’s trade balance returned to surplus for the first time in five months following a record deficit in July, data showed last week.

“As the rupiah is still seeing high volatility, buying the dollar debt of Indonesia is one good option to expose yourself to the improving macroeconomic picture,” Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai, Japan’s biggest mutual fund, said in an Oct. 1 interview. “Economic stabilization will bring the country back to a sustainable growth path and compress the credit-risk premium.”

‘Bounce Back’

The yield premium investors demand to own Indonesia’s dollar notes over U.S. Treasuries narrowed 88 basis points, or 0.88 percentage point, to 285 from a four-year high of 373 on Sept. 4, according to JPMorgan Chase & Co.’s EMBI Plus Index.

The yield on Indonesia’s 5.375 percent dollar notes due October 2023 fell four basis points to 5.23 percent today, the lowest level in two weeks, according to data compiled by Bloomberg. The rate for the similar-maturity rupiah securities was steady at 8.11 percent.

Indonesia’s government has a debt-to-gross domestic product ratio of 23 percent, the lowest in Asia, while its budget deficit of 1.14 percent matches that of China and is the smallest in the region after Taiwan’s 0.1 percent, according to data compiled by Bloomberg.

JPMorgan Asset Management is buying more Indonesian dollar bonds, while being underweight on the rupiah, Pierre-Yves Bareau, the London-based global head of emerging-market debt, said in an interview in Singapore last month. Indonesia’s economy has the capacity to “bounce back,” given its low debt-to-GDP figure, he said.

‘Structurally Bearish’

Morgan Stanley prefers Indonesia’s dollar bonds over those of Turkey and South Africa and sees scope for the securities to outperform, London-based strategist Robert Tancsa wrote in a Sept. 26 report. Along with India and Brazil, the three countries have been dubbed the “fragile five” emerging-market economies by the U.S. lender because of their high current-account deficits.

Indonesia’s foreign debt is 29 percent of GDP compared with 43 percent for Turkey and 36 percent for South Africa, according to the Morgan Stanley report. The bank remains “structurally bearish” on the rupiah, and says Indonesia needs to rebuild its foreign-exchange reserves, according to the report. Reserves rose 2.9 percent to $95.7 billion in September, official data showed today, paring the decline this year to 15 percent.

The rupiah’s Sharpe ratio, which measures returns adjusted for price fluctuations, was minus 1.5 over three months, the least among 23 emerging markets tracked by Bloomberg. Its three-month implied volatility, a measure of expected moves in the exchange rate used to price options, more than doubled to 15.04 percent this year. That’s the highest in Asia, followed by 14.02 percent for India’s rupee and 10.78 percent for Japan’s yen.

‘Better Liquidity’

“We like Indonesia’s dollar bonds because they have better liquidity, while for rupiah-denominated bonds there is a need to consider the currency risks,” Chia Tse Chern, head of Singapore and Asia fixed-income at UOB Asset Management, which oversees S$41.5 billion ($33 billion), said in a Oct. 1 interview.

Inflation in Southeast Asia’s largest economy accelerated from 5.47 percent in May to 8.79 percent in August as the government raised the price of subsidized fuel in June and the weaker currency pushed up the cost of imported goods. Consumer-price gains eased to 8.4 percent last month.

The August trade surplus was $132 million, following a $2.3 billion shortfall in July, official data show. The current-account deficit reached $9.8 billion in the three months through June, the largest in data compiled by Bloomberg going back to 1989, following shortfalls in the previous six quarters.

Policy Response

Bank Indonesia raised its benchmark interest rate by 1.5 percentage points to 7.25 percent since mid-June in an attempt to slow the economy and reduce the deficits. It will increase the rate by 25 basis points tomorrow and another 25 basis points in November, according to a Goldman Sachs Group Inc. research report on Oct. 4. The government announced in August that it would allow more shipments of unprocessed mineral ores for the rest of this year and increase a tax on luxury imported goods.

Amundi, a Paris-based asset manager that oversees about $1 trillion, and BNP Paribas Investment Partners said they are increasing investments in both Indonesia’s dollar and local-currency bonds. The measures to improve the trade balance will have an effect in the coming months, Mark Capstick, a London-based portfolio manager at BNP Paribas, which oversees 478 billion euros ($649 billion), said in a Sept. 26 e-mail.

“The repricing of Indonesian assets has brought valuations much closer to where we see fundamental relative value,” he said. “We are however still very concerned over the fragility of the currency in the context of the external environment so are very slightly underweight.”

Cyclical Challenges

Indonesia’s economy will probably grow 5.78 percent this year, according to the median forecast in a Bloomberg survey. Gross domestic product increased 6.23 percent in 2012 and has risen by an average of 5.74 percent over the last 10 years.

The cost to protect the country’s bonds from non-payment using five-year credit-default swaps fell 58 basis points to 245 basis points on Oct. 4 from a 22-month high of 303 on Aug. 27, according to CMA prices.

“Indonesia’s long-term economic potential remains intact with very low debt-to-GDP and conservative budget deficits,” Raymond Lim, head of Asian bonds in Singapore at Amundi, said in a Oct. 1 e-mail. “The challenges faced by Indonesia are cyclical in nature.”

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