Indonesia Bonds Complete Best Week in Two Months on Subsidy Plan

Indonesia’s bonds advanced this week, with the 10-year yield falling by the most since October, as the government moves forward with plans to curb fuel subsidies.

The yield on sovereign notes due March 2024 slid 19 basis points, or 0.19 percentage point, from Dec. 19 to close at 7.87 percent, prices from the Inter Dealer Market Association show. That’s the biggest weekly drop since the period ended Oct. 24. The yield was down one basis point today, before a two-day holiday that starts tomorrow.

The government will announce the magnitude of its fixed fuel subsidies “soon” and seek parliamentary approval next month, Sofyan Djalil, coordinating minister for the economy, said on Dec. 22. Setting the amount of aid for each liter of fuel at 1,000 rupiah would reduce the subsidy bill to 2.5 percent of total state spending, compared with the current 9 percent, Oversea-Chinese Banking Corp. economist Wellian Wiranto wrote in a report yesterday.

“Fixed subsidies would see our fiscal risk diminish significantly and pave the way for rating upgrades,” said David Sumual, chief economist at PT Bank Central Asia in Jakarta, who predicts the 10-year yield will drop to 5 percent in 2015. “The market is still conservative in pricing in this positivity, considering the pending parliamentary approval.”

The rupiah strengthened 0.2 percent this week and fell 0.1 percent today to 12,468 a dollar, prices from local banks show. In the offshore market, one-month non-deliverable forwards lost 0.3 percent from Dec. 19 to 12,568, data compiled by Bloomberg show. Bank Indonesia set a fixing used to settle the contracts at 12,467, from 12,500 on Dec. 19.

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