Disputed Indonesia Election Deterring State Street: Asean Credit

Indonesia’s disputed election and budget deficit are keeping Schroder Investment Management Ltd. and State Street Global Advisors from adding to holdings of the nation’s bonds, even as the rupiah and stocks rally.

The price of Indonesia’s 8.375 percent notes due March 2024 rose 0.7 percent this week in local-currency terms, pushing the yield down 11 basis points to 8.03 percent, as most unofficial counts showed Joko Widodo winning the July 9 election. The rupiah and the Jakarta Composite index of shares reacted more positively, gaining 2.4 percent and 2.2 percent.

Widodo, who has a lead of about five percentage points based on most initial tallies, has pledged to cut fuel subsidies that strain government finances and contributed to Indonesia raising its budget deficit to 2.4 percent of gross domestic product from 1.69 percent last month. Prabowo Subianto, who has alarmed some investors with pledges to increase borrowing to spur growth, said quick counts done by companies he used for guidance showed him in the lead.

“We remain cautious in the near term as the final results haven’t been announced,” Ng Kheng Siang, head of Asia-Pacific fixed income at State Street, which oversees $2.38 trillion, said in a July 9 interview from Singapore. “A challenge by way of just a recount of votes should not rattle the market. However, if it involves street protests, accusations of rigged elections and mud-slinging of sorts, the market will not take this well.”

Budget Pressure

Indonesia’s bonds, rupiah and stocks fell today for the first time this week. The benchmark 10-year yield rose one basis point, or 0.01 percentage point, as of 11:26 a.m. in Jakarta. The currency fell 0.2 percent to 11,598 per dollar and the benchmark stock index slid 1.7 percent.

The Election Commission began the task of counting the 140 million votes yesterday to meet a deadline of announcing the official results by July 22. The Constitutional Court will rule on any subsequent legal challenges by Aug. 24. Both candidates urged supporters to guard against attempts to manipulate the tally in their victory speeches.

The government set aside 246.49 trillion rupiah ($21.3 billion) for energy subsidies in its revised 2014 budget, up from an earlier estimate of 210.73 trillion rupiah. The goal “may not be achievable without a further revision of retail fuel prices,” Fitch Ratings analysts led by Andrew Colquhoun in Hong Kong wrote in a note yesterday. The cost of crude in New York has climbed 4.5 percent this year.

An administration led by Widodo, known locally as Jokowi, would maintain budget discipline and cut fuel subsidies to fund projects, Fauzi Ichsan, acting head of the finance and banking team of Jokowi’s Indonesian Democratic Party of Struggle, said in an interview last month.

Benchmark Rate

Prabowo sees Southeast Asia’s largest economy as “underleveraged” and would increase the debt-to-GDP ratio toward 50 percent from last year’s 24 percent to boost economic expansion to as fast as 10 percent, Hashim Djojohadikusumo, his brother and economic adviser, said in June.

Bank Indonesia held its benchmark interest rate at 7.5 percent yesterday, as predicted by all 21 analysts surveyed by Bloomberg. The policy rate will be increased to 8 percent by the end of March, Goldman Sachs Group Inc. said in a research note yesterday written by Chief Asia Economist Andrew Tilton in Hong Kong. Indonesia’s 10-year rupiah bond yield of 8.03 percent, compares with Malaysia’s 4 percent and the Philippines’ 4.16 percent.

Jokowi’s plan “would lead to regular increases of fuel prices, which would keep inflation a little bit up, but it is a problem which needs to be solved,” Rajeev De Mello, who manages $10 billion as Schroder’s head of Asian fixed income in Singapore, said in an interview yesterday. Aside from concern over the vote and subsidies, “I do think Indonesian bonds offer attractive yields,” he said.

Switching Sides

There are already signs that Golkar, the second-largest party and part of Prabowo’s coalition, could switch its support to Jokowi if he becomes president. It’s not possible for Golkar to be in opposition, Zainal Bintang, deputy chairman of the party’s advisory board, said in an interview yesterday. Jusuf Kalla, Jokowi’s running mate and a former Golkar chairman, is one of the party’s best members, Bintang said.

Golkar switching sides would give Jokowi 53 percent of parliamentary seats, and would boost the rupiah to 11,000 per dollar, Geoffrey Kendrick, Hong Kong-based strategist at Morgan Stanley and the Indonesian currency’s most-accurate forecaster in the past four quarters, wrote in an e-mail yesterday.

Indonesia’s second-quarter current-account deficit will be around $9 billion, Perry Warjiyo, central bank deputy governor, said July 3. That would be close to the record $10 billion in the same period last year, which helped spur a 21 percent plunge in the rupiah in 2013.

Gains Limited

Indonesia “needs to tackle the twin deficits and be more stringent in managing fiscal spending, where Jokowi’s government seems more prudent, which we welcome,” Sean Chang, Hong Kong-based head of Asian debt investment at Baring Asset Management Ltd., which oversaw 44.4 billion euros ($60 billion) of assets globally in May, said in a July 9 interview.

The cost of insuring Indonesian debt against non-payment using five-year credit-default swaps fell four basis points this week to 147, according to CMA. That compares with a three basis point climb to 86 for the Philippines and a gain of five points to 85 for Malaysia.

This week’s rally in the rupiah extended its gain in 2014 to 4.9 percent, compared with increases of 2.8 percent for Malaysia’s ringgit and 2.1 percent for the Philippine peso. The Jakarta stocks gauge closed at the highest level since May 2013 yesterday. Indonesia’s local-currency bonds rose 6.9 percent in 2014, with the 3.4 percent gain for Thai securities the next-best performance in Southeast Asia, Bloomberg indexes show

“The current rallies are probably short-lived,” Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which oversees about $36 billion, said in an interview yesterday. “Even if Jokowi’s victory is confirmed, there’s still uncertainty over how the coalition will be set up at parliament and what kind of policies they will introduce, limiting gains in the rupiah and bonds.”

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