Fidelity Sees Indonesia Buying Opportunity as S&P Keeps at Junk

  • Holdings in fund 21.7 percent versus 4.3 percent last year
  • Fidelity underweight Thai and Malaysia dollar bonds: Wong

Fidelity International says any weakness in Indonesia’s dollar bonds is a buying opportunity and that it gives the nation an investment-level score, after S&P Global Ratings refrained from raising the country’s rating last week.

It’s only a “matter of time” before S&P upgrades Indonesia, said Eric Wong, a portfolio manager at Fidelity International, who manages The Fidelity Funds - Asian Bond Fund, which invests mainly in investment-grade fixed-income securities and has returned 4.8 percent this year. Wong cited a manageable debt-to-gross domestic product ratio and disciplined government spending as reasons he considers Indonesia investment-grade.

“I’m still very constructive on Indonesia,” said Hong Kong-based Wong. His fund increased its exposure to the nation’s sovereign and corporate bonds to 21.7 percent as of May 31 versus 4.3 percent on June 30, 2015. “Any weakness that you see as a result of this reaffirmation of high yield” is a buying opportunity, he added.

S&P stands alone among the three major debt assessors in keeping the country below investment grade after affirming its BB+ rating and positive outlook on June 1.

S&P View

“Our decision to affirm the ‘BB+’ ratings on Indonesia reflects the country’s low per capita income and moderate fiscal and external indicators,” S&P said in an e-mailed reply to questions. “These factors balance Indonesia’s improved policy and institutional settings, credible monetary policy, and buoyant economic growth. The positive outlook reflects the possibility that we may raise the ratings if the improved fiscal framework indeed delivers better fiscal performance, such that deficits decline and borrowings remain low.”

While President Joko Widodo has helped fund infrastructure spending by cutting gasoline subsidies, he’s seeking fresh ways to tackle the budget deficit after tax revenue was only 28 percent of the target at the end of May. Jokowi, as the former Jakarta governor is known, has cut ministerial spending as he seeks to finance a $360 billion five-year development program put in place in 2015 to build railways, power plants and seaports.

Indonesia’s $2.25 billion of 4.75 percent sovereign bonds due in 2026 fell 0.2 cent on the dollar the day after S&P kept the nation at non-investment grade, before reversing course to rise 1.3 cents to 107.1 cent since then, according to Bloomberg-compiled data.

Portfolio outflows present a risk for Indonesia, given the high level of foreign ownership in its rupiah bond market, according to Fidelity’s Wong. As oil prices recover, the Indonesian government will also have to demonstrate its commitment to letting market forces determine fuel prices, he said.

Underweight Malaysia

Fidelity is underweight Malaysia’s bonds, as it is concerned over slowing growth and the impact of the 1Malaysia Development Bhd. scandal on the single A rated country’s reputation.

“It’s a cloud looming over the country,” said Wong. It matters for a high-rated sovereign such as Malaysia, as it reflects on the nation’s “checks and balances,” he said.

Fidelity is also underweight Thailand’s dollar bonds as its economic growth is weak. “Valuation wise, Thai dollar-denominated bonds are quite rich,” said Wong.

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