Friday, May 17, 2013

Indonesian bonds are at risk of collapse -Pictet to Manulife Bracing for Indonesia Declines: Asean Credit

An Indonesian woman sorts shoes at a shopping center in Jakarta on May 15, 2013. Indonesia’s economy grew 6.02 per cent in the first quarter from a year earlier, the Central Bureau of Statistics said, the slowest rate in two years. The central bank forecast growth in South-East Asia’s largest economy to be 6.2-6.6 per cent this year. 

Indonesian bonds are at risk of collapse as next year’s elections limit the chance fuel subsidies will be reduced, according to Pictet Asset Management and Manulife Asset Management Indonesia.
The yield on benchmark 10-year notes rose 36 basis points this year to 5.55 percent as the government floated proposals to raise fuel prices without implementing a plan.

President Susilo Bambang Yudhoyono made an increase conditional on parliament approving a compensation package for the poor, in a nation where 115 million people live on less than $2 a day, on April 30. Standard & Poor’s cut the outlook on the nation’s credit rating two days later, citing a stalling of reform momentum.

Indonesia spent Rp 211.9 trillion ($21.7 billion) on subsidizing fuel last year, worsening the budget shortfall and aggravating a current account that was in deficit for six quarters through March.
Mandiri Sekuritas says the size of the yet-to-be announced relief program could be as much as Rp 30 trillion, more than the 2013 savings from cutting the subsidies, while Pictet says the elections reduce the chance of the plan being approved.

“Indonesia’s risk perception will surge if this plan falls through, which will be very bad for the market,” Ezra Nazula, who manages Rp 25 trillion of assets as head of fixed-income at Manulife in Jakarta, said in a May 14 interview.

“Right now we can’t even determine at what level we can reenter the market because of the back-and-forth.”

Shifting options

The government announced it may adjust the subsidized fuel price on Jan. 7. Since then, ministers have publicly floated several options, including raising the price for private vehicles excluding motor cycles, before settling on the most recent proposal for an across-the-board increase in the gasoline price to Rp 6,500 a liter from Rp 4,500 a liter.

While authorities could have implemented that plan without approval, President Yudhoyono chose to make it dependent on getting the go ahead for the relief package from a parliament that last year rejected a government attempt to raise the gasoline price to Rp 6,000 a liter. The yield on Indonesia’s 10-year sovereign bonds rose 58 basis points to 6.51 percent in the two months following that decision on April 1, 2012, according to data compiled by Bloomberg.

Without a reduction in fuel subsidies, the 2013 budget deficit may reach a record 3.83 percent of gross domestic product, more than double the 1.65 percent target, Yudhoyono said on April 30.
‘Very damaging’

“It would be very damaging if a price hike is delayed once again,” Wee-Khoon Chong, Asia rates strategist at Societe Generale SA in Hong Kong, said in a May 14 research note.

Indonesia’s six consecutive current-account shortfalls, the longest run of deficits since 1997, contributed to a 4.7 percent drop in the rupiah to 9,800 per dollar in the past 12 months, the worst performance among Asia’s 10 most-traded currencies excluding the yen. That compares with a 5.8 percent rally in the Thai baht, a 4.2 percent advance in the Philippine peso and a 3.4 percent gain in Malaysia’ ringgit.

S&P, the only one of three major ratings companies that hasn’t raised Indonesia to investment grade, said in a May 2 statement that the nation’s $3,800 gross domestic product per capita was relatively low compared with similar-rated countries.

This gives it “limited ability, relative to wealthier peers, to ensure policy flexibility,” Singapore-based credit analyst Agost Benard wrote in the statement.

“The government also has less room to maneuver, when maintaining creditworthiness would require unpopular polices.”

Foreign inflows

Along with other Southeast Asian countries, Indonesia’s government bonds have been supported by inflows caused by monetary easing in developed nations. The yield of 5.55 percent on 10-year sovereigns compares with 3.32 percent in Thailand, and 3.04 percent in Malaysia and the Philippines, according to data compiled by Bloomberg.

This regional yield advantage helped lure a net $2.4 billion to Indonesian government securities since April 4, the day the Bank of Japan announced it would buy 7.5 trillion yen ($73 billion) of bonds per month.

Manulife’s Nazula said he favored notes with tenors of 15 years or more as these would be less affected, whether or not fuel subsidies were cut, as investors chased higher yields.

Inflation reached a 22-month high of 5.9 percent in March before easing to 5.57 percent in April, official data show. Bank Indonesia estimated this week that consumer-price gains could accelerate to 7.8 percent if the gasoline and diesel prices were raised to Rp 6,000 a liter.

Yield forecast

If fuel prices are lifted, the 10-year yield will reach 6.2 percent by year-end due to accelerating inflation, Handy Yunianto, a fixed-income analyst at Mandiri Sekuritas, a unit of the country’s largest bank, said in a May 14 interview from Jakarta. The yield will increase even more if subsidies are not lowered, he said.

“A fuel subsidy cut should be able to help the fiscal situation,” Sean Chang, Hong Kong-based head of Asian debt at Baring Asset Management, which oversees $52 billion globally, said in a May 15 interview.

“The market has already priced in most of the good news.”

The cost of insuring Indonesian debt using five-year credit-default swaps rose eight basis points, or 0.08 percentage point, this month through May 15 to 138, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That compares with a seven basis point drop to 76 for Malaysian notes and declines of four basis points in Thailand and the Philippines to 83 and 85, respectively.

Political considerations

Details of the government’s compensation package will be included in the revised 2013 budget, Coordinating Minister for the Economy Hatta Rajasa said on May 13. Once the plan has been submitted it will take about a month before it gets to the plenary meeting stage, where it will be debated by lawmakers, Speaker of the House Marzuki Alie said on May 14.

Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation, S&P said in its May 2 statement.

“The election is coming up so the chance of this plan being implemented in a meaningful way could be reduced,” Wee- Ming Ting, Singapore-based head of Asian fixed income at Pictet Asset, which oversees $29 billion of emerging-market debt, said in a May 15 interview.
“Then again, they may surprise us.”
Bloomberg By Yudith Ho (EPA Photo/Mast Irham)

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