Indonesia’s offshore rupiah bonds can withstand rising U.S. rates.
By Andy Mukherjee
In the middle of this year, Kartika Wirjoatmodjo told me about nasi goreng bonds.
The president director of PT Bank Mandiri, Indonesia’s largest lender by assets, was exploring options for a rupiah-denominated debt offering in international markets by PT Jasa Marga Persero, operator of the country’s highway system. Since similar Chinese securities were called dim sum, and Indian notes were being referred to as masala offerings, nasi goreng seemed an appropriate name.
Never mind that another moniker was chosen. On Dec. 1, Jasa Marga sold Indonesia’s first komodo bond, named after a giant lizard native to the archipelago. The three-year, 4 trillion rupiah ($300 million) global security was priced at a better-than-forecast 7.5 percent. Expect more issues in 2018. State-owned infrastructure company PT Wijaya Karya Persero is widely known to be planning its own rupiah bond offshore.
When international investors become more accepting of maturities longer than three years, then even institutions like Mandiri will want to tap the market, says Kartika. For that to happen, though, Indonesia will first have to prove that komodos are safe from the U.S. Federal Reserve.
Foreigners have an appetite for rupiah debt for two reasons. One, Indonesia became investment grade at all three major rating companies this year. Two, onshore local-currency bonds of state-owned firms offer a handsome yield pickup over sovereign debt. That’s luring investors to bear the risk of depreciation in the Southeast Asian currency — not a trivial threat if U.S. interest rates keep rising to contain any overheating from President Donald Trump’s tax cut, or “new economic miracle,” as he calls it.
For now, everyone’s convinced Jakarta won’t do anything rash. Yes, Bank Indonesia did take a calculated risk by cutting interest rates back-to-back in August and September, but that only led to a temporary jump in rupiah volatility, which has petered out since. Inflation is under control at 3.3 percent. The bond market shows none of the disquiet we are starting to see in India, a fellow member of Morgan Stanley’s “Fragile Five” club during the Fed’s taper tantrum episode of 2013.
Still, stability isn’t guaranteed. This year’s jailing of a former Jakarta governor on blasphemy charges has raised the risk that the politics of religion and race could raise their head ahead of presidential elections in April 2019. That could put off the wealthy Chinese minority, leading to capital flight from the world’s most-populous Muslim nation.
For now, though, the mood is optimistic. Mandiri’s own asset quality is getting better as the aftershocks of the global commodity meltdown dissipate. Kartika is right to expect both car and motorcycle sales to keep reviving, and for the palm-oil business to continue to restructure as stronger players move in on inefficient plantations.
It doesn’t help when Wijaya Karya, probably the next issuer of global debt, finds its largest project to have become a drag on margins. The Jakarta-Bandung high-speed rail has been marked by a slow pace of completion and stretched payment schedules, according to Mirae Asset Sekuritas.
Still, President Joko Widodo is well aware that stepping up the country’s $350 billion infrastructure program will be his best shot at winning a second term. Most of the demand for Jasa Marga’s bond came from asset managers — and not rich Indonesian private-bank clients.
That shows serious global investors are willing to bet on the komodo lizard coming out intact at the other end of the Fed’s rate-raising cycle.
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