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The Republic of Indonesia plans to “frontload” its bond sales denominated in US dollars, euros and yen next year ahead of an expected US rate hike, Robert Pakpahan, the director general of the Finance Ministry’s debt management office, said on Wednesday.
Asean’s biggest economy by GDP plans about Rp450 trillion ($37 billion) of debt issuance in international and local bond markets next year, similar to 2014’s record-breaking level, Pakpahan said at FinanceAsia’s biannual Borrowers’ and Investors’ Forum.
Many sovereign borrowers, such as the Philippines, look to tap bond markets early in the calendar year but the urgency to lock in funding has been heightened by expectations of a US interest rate hike at some point in 2015.
Pakpahan noted that Indonesia’s 2014 targeted issuance is close to $37 billion in local currency and international bonds -- almost double 2011’s total. “We think we will be able to complete this task for 2014,” he said.
The breakdown between international and domestic borrowing in 2015 will be similar to this year; about 80% from local currency markets and the rest from overseas, he said.
Indonesia is looking to lessen its exposure to international debt markets. The country's outstanding debt is around $215 billion, with 44% denominated in foreign currency and 56% in rupiah. “We will diversify funding in terms of investor base and currency,” he said.
Indonesia issued a debut 1 billion euro bond in July and a $1.5 billion sukuk in September.
Given this level of targeted borrowing, any ambitious spending plans will have to be financed by other means.
Indonesia’s infrastructure is in a parlous state and in desperate need of $545 billion over the next five years, according to the government's mid-term development plan to 2019.
“We have to look at the creation of project bonds or infrastructure bonds that the public sector can subscribe to with some sort of assurances," Edward Gustely, a managing director at Penida Capital and an adviser to the Indonesian government, said.
Pakpahan called his planned borrowing a “baseline budget” that he decided prior to President Joko ‘Jokowi’ Widodo's rise to power. So the new administration may yet choose to revise his targets.
Widodo was elected president in July with a mandate for reform, including a plan to cut the country’s expensive fuel subsidy. The fuel subsidy is set to cost the government Rp246.5 trillion ($20.5 billion) this year – up from Rp82.4 trillion in 2010.
Although a cut is deemed crucial by businesses and investors to free up funds for infrastructure projects, the public – accustomed to low fuel prices – may not be so welcoming.
Currency mismatch
Investors are increasingly concerned that Asian borrowers are not properly hedging their exposure to foreign currencies, given increasing market volatility and a regulatory clampdown on derivatives which has made currency swaps less viable.
Pakpahan noted that more Indonesian companies have been tapping international bond markets since last year, when Indonesia hiked its benchmark interest rate to the highest level in four years.
“The cost of funding domestically has been getting more expensive therefore they look around … and that has become a concern for the central bank in coordination with the Ministry of Finance,” he said.
He said Indonesia is implementing measures to slow down the move offshore, including asking borrowers to give 60 days’ notice.
He added that Indonesia itself does not have a substantial mismatch between its liabilities and revenues in US dollars as it generates revenues in US dollars from oil and gas royalties. He noted a mismatch only in yen, which accounts for only a small percentage of its outstanding debt.
