Indonesian Bonds Advance for Second Month After Fuel Subsidy Cut

Indonesian sovereign bonds advanced for a second month, pushing the 10-year yield to a one-year low, after the government cut fuel subsidies.

Gasoline and diesel price rises took effect Nov. 18, a move Finance Minister Bambang Brodjonegoro said would free up as much as 140 trillion rupiah ($11.5 billion) in the 2015 budget. The increases were also seen as evidence President Joko Widodo, who took office Oct. 20, would be able to implement a reform agenda. This helped lure 18.4 trillion rupiah of foreign inflows to rupiah sovereign debt this month through Nov. 26, the most since May, finance ministry data show.

The yield on the 8.375 percent bonds due March 2024 fell 33 basis points, or 0.33 percentage point, in November to 7.70 percent, prices from the Inter Dealer Market Association show. That’s the lowest level since Oct. 31, 2013. The yield fell 10 basis points this week and was steady today.

“Foreign funds bought our notes aggressively as confidence returned,” said I Made Adi Saputra, a fixed-income analyst at PT BNI Securities in Jakarta. “With further improvements made to the budget composition, it’s not far-fetched to expect a rating upgrade from Standard & Poor’s.”

S&P ranks Indonesia’s debt at the highest junk level, while Moody’s Investors Service and Fitch Ratings grant it the lowest investment-grade rating. Moody’s said in a Nov. 19 note that the fuel-price increase was credit positive as it signals the country’s commitment to economic reform and will reduce the budget and current-account shortfalls.

Fixed Subsidy

The finance ministry will propose a fixed subsidy of 1,000 rupiah to 2,000 rupiah a liter by 2016 to make the budget less affected by oil-price swings, a government official who asked not to be named as the discussions are private, said Nov. 26

The rupiah weakened 1 percent this month to 12,204 per dollar, prices from local banks show. In the offshore market, one-month non-deliverable forwards dropped 1 percent in November to 12,242, according to data compiled by Bloomberg. The spot rate fell 0.2 percent today, while the contracts declined 0.4 percent.

Bank Indonesia set a fixing used to settle the forwards at 12,196 per dollar today, compared with 12,179 yesterday and 12,082 on Oct. 31.

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