Indonesian Bonds Complete Second Weekly Drop on Subsidy Concern

Indonesia’s five-year bonds fell for a second week on concern outgoing President Susilo Bambang Yudhoyono’s plan to raise energy subsidies will worsen public finances.

The government is proposing to increase fuel subsidies in the revised 2014 state budget by 74 trillion rupiah ($6.4 billion) to 284.9 trillion rupiah to reflect expectations the rupiah will be weaker than previously estimated, Finance Minister Chatib Basri told reporters in Jakarta on May 26. Yudhoyono is stepping down this year after two five-year terms, with presidential elections set for July 9.

“The government still wants to subsidize fuel,” said Herbie Perdana Mohede, fund manager for fixed income and equities in Jakarta at PT Samuel Asset Management, which oversees 2.5 trillion rupiah. “That’s why bond yields are rising.”

The yield on the 7.875 percent sovereign notes due April 2019 increased six basis points, or 0.06 percentage point, this week to 7.69 percent as of 4:39 p.m. Jakarta time, according to the Inter Dealer Market Association. It fell three basis points today and added five basis points in May.

The rupiah is now seen at 11,600 to 11,700 per dollar in the budget, compared with an earlier assumption of 10,500, Basri said this week. Indonesia will increase bond sales by 69 trillion rupiah to fund the 2014 budget deficit forecast at 2.5 percent of gross domestic product, Robert Pakpahan, head of the Finance Ministry’s debt management office, said last week. The government previously estimated the shortfall at 1.69 percent.

Trade Deficit

Indonesia probably recorded a trade deficit in April due to rising imports, central bank Governor Agus Martowardojo told reporters in Jakarta today. Data due June 2 will show the nation’s trade surplus narrowed to $285 million in April from $673 million the previous month, according to the median estimate of economists in a Bloomberg survey.

The rupiah slipped 0.5 percent this week to 11,675 per dollar in Jakarta, after losing 1.7 percent last week in its biggest five-day loss since November, prices from local banks show. It’s gained 4.2 percent this year, the second-best performance among the 10 most-active Asian currencies. Local financial markets were shut May 27 and yesterday for holidays.

One-month implied volatility, a measure of expected currency swings used to price options, declined nine basis points this week to 9.03 percent. It dropped six basis points today.

In the offshore market, one-month non-deliverable rupiah forwards fell 0.8 percent in the past five days to 11,712 per dollar, data compiled by Bloomberg show. Bank Indonesia set a fixing used to settle the contracts at 11,611, compared with 11,560 on May 23.

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