Best Asian Bonds Get Added Boost as Indonesia Passes Tax Amnesty

  • Extra revenue will narrow biggest fiscal deficit since 1998
  • Expected pause in global sales to lift dollar debt: Mandiri

Asia’s best-performing sovereign bonds just got an extra tailwind after Indonesian lawmakers passed a tax amnesty forecast to lure 560 trillion rupiah ($43 billion) back to Southeast Asia’s biggest economy. 

The return of undeclared income will bolster the rupiah, making Bank Indonesia more likely to add to four interest-rate cuts this year, while global market turmoil reduces the odds of a Federal Reserve increase. The central bank estimates the repatriations will boost government coffers by around 53 trillion rupiah, curbing a widening fiscal gap. Indonesia’s global and local-currency paper has returned 14 percent and 13 percent this year, respectively. 

“With the anticipation for all those inflows the rupiah will remain supported, so that allows investors to invest in Indonesia’s bonds comfortably,” said Ezra Nazula, who helps manage $4 billion as head of fixed income at PT Manulife Aset Manajemen Indonesia in Jakarta. S&P Global Ratings, which left Indonesia at junk in June, may make an upgrade in October or November, he said.

Indonesia’s local-currency sovereign bonds have lured 81.5 trillion rupiah of foreign funds to far this year and even attracted inflows on June 24, the day after Britain voted to leave the European Union. The yield on Indonesia’s rupiah notes due 2026 has fallen 25 basis points to 7.42 percent since the amnesty bill was passed on Tuesday. A drop to 7 percent by year-end is “very doable,” said Nazula. The country’s dollar notes also got a boost, with the 10-year yield declining 23 basis points to 3.59 percent.

The tax amnesty, which starts in July, will boost economic growth by 0.3 percentage point, according to Bank Indonesia. The authority is forecasting expansion of as much as 5.4 percent in 2016 from a six-year low of 4.79 percent in 2015. The reprieve will shrink the budget deficit to 2.35 percent of gross domestic product from 2.8 percent, the widest gap since the Asian financial crisis.

It shows the government can do what’s necessary, auguring well for the nation’s bonds, said Pin Ru Tan, an Asian rates strategist at HSBC Holdings Plc in Singapore. The lender has a buy recommendation on the nation’s dollar debt due 2026 and 2046, as well as the 10-year rupiah notes, for which it’s targeting a yield of 7 percent.

Indonesia’s global bonds are getting extra tailwinds from a tax rule and a dearth of new supply. A withholding tax on foreign-currency notes sold overseas was scrapped last month and if the government sticks to targets in its sale plan it won’t sell any more of the debt this year after $7.8 billion of dollar, euro and yen sales since December.

“Investors will be forced to go to the secondary market to buy,” said Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas in Jakarta. “That’s likely to pressure yields further.”

Dovish Fed

While the amnesty and the tax change are positives, Indonesian sovereign bonds will struggle to maintain strong inflows due to the more risk-averse global environment after Brexit, said Manu George, a Singapore-based Asian fixed-income investment director at Schroder Investment Management Ltd., which oversees about $437 billion globally.

“We don’t expect significant flows into Indonesia in the near term,” he said. The debt should be attractive in the medium term as developed-market yields are expected to stay lower for longer, said George.

Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong, sees a dovish Fed as having more influence on Indonesian debt. The chance of a U.S. rate increase by the end of the year has fallen to 9 percent, from 44 percent before the Brexit vote, futures contracts show.

“Funds have been going to Indonesia and I expect this trend to continue, especially now that Fed hike expectations are pushed out,” she said. “We still think that it still has some way to go with revenue side reforms but the external environment is favorable for Indonesia to be funded by foreign investors.”

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