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The Republic of Indonesia begins global roadshows on Thursday for a new global sukuk deal, its first benchmark borrowing of the year in the offshore markets.
The prospective Reg S/144a transaction is being led by CIMB, Citi, Deutsche Bank, Dubai Islamic Bank and Standard Chartered.
A few weeks ahead of the roadshow, Robert Pakpahan, Indonesia's director general of budget financing and risk management, spoke to FinanceAsia about the sovereign's funding plans for the year in an interview, which will be published in the April edition of the magazine.
Pakpahan says he hopes declining oil prices and shrinking investment funds from the Middle East will not affect the pricing prospects for the new deal.
What’s your fundraising target this year?
Robert Pakpahan: Each year, we have a gross borrowing requirement, which includes redemptions and loan draw-downs, plus a net borrowing requirement. The former is based on a forecast budget deficit at 2.1% of GDP and stands at Rp542.6 trillion ($40.48 billion) of which Rp412.4 trillion will come from the domestic market and Rp130.2 trillion from international markets.
The remaining Rp75.1 trillion will come from external loans. The net borrowing requirement will be Rp330.9 trillion.
Last year, foreign currency debt accounted for 21% of gross issuance. This year we’re targeting 24%, but that figure could rise to 30% subject to market conditions later in the year.
What currencies are you targeting?
Dollars, euros, and yen. There will probably be a split of roughly $7 billion in dollars, $500 million equivalent in yen and $1.85 billion equivalent in euros. We thought about an inaugural Panda bond [a bond issued by a foreign entity in China's domestic market], but decided against it for this year at least.
We’re quite happy with our level of investor diversification at the moment.
We’re also planning a split of 76% in conventional bond issuance and 24% sukuk [Islamic] bond issuance.
Last December you pre-funded part of your 2016 requirement. Were you happy with that transaction?
Yes, we raised $3.5 billion from a split 10-year and 30-year dollar-denominated bond. This was the first time the legislature had enabled us to pre-fund.
It worked out very well because the markets ended up being very volatile in January when we normally come to market. The president [Joko Widodo] also accelerated infrastructure spending in January so we had the funds to draw on. Tax revenues in the early part of the year are also not that strong.
What’s your view on liability management and potentially extending the duration of your maturity profile?
The average time to maturity of our debt portfolio is currently 9.6 years. During 2016 it’s likely to come down to about nine years. But we think this is still a safe duration and it reduces our cost of funds.
We’re not planning any liability management exercises for our international bonds, as the maturity spectrum is quite manageable. We do sometimes do switches and buybacks domestically, but this isn’t a priority for us either.
What about getting an SEC shelf registration to diversify your US investor base?
We did study this, but again we’ve decided against it since progressively more and more US investors can buy our bonds through our MTN programme.
Can you describe your broad strategy?
It’s still the same as last year. We want to frontload as much as possible. We’re hoping to raise 62% of our gross issuance by the end of the first half. This should help us to get in ahead of possible hikes in the Fed Funds rate and potential uncertainty in the global bond markets.
If market conditions sour we’ll also target the private placement market.
So you think the US Fed will raise rates this year?
Well, we embarked on the frontloading strategy because we anticipated increases. No one, least of all us, thought 10-year Treasuries would sink below 2%. I don’t know whether the Fed will continue raising rates this year, but I definitely don’t think yields will stay below 2% all year.
Based on [Janet] Yellen’s latest speech and economists’ current forecasts, a rate rise is looking less likely.
You mentioned sukuk issuance. Aren’t you worried about the impact of falling oil prices on the amount of investment funds available from the Middle East?
Yes, we understand liquidity is much tighter because of what’s happened and we’re also told that some Middle Eastern countries will issue more sukuks to fund their budget deficits. We hope it won’t affect our pricing. Sukuks normally come at a small premium to conventional debt.
Last year we priced almost at parity. We hope to do the same again this year.
Why is this asset class so important to you?
Firstly, Indonesia is a Muslim country and secondly, because it helps diversify our investor base. We’ve found Islamic funds very enthusiastic towards us.
This asset class is becoming more and more important in our portfolio. In 2015, sukuk issuance amounted to about 17% to 18% and this year, it’s likely to rise to about 24% of gross issuance.
Last May, we executed a $2 billion 10-year sukuk, which represented the world’s largest-ever single tranche sharia-compliant issue. We were very happy with it. This year we’re looking at roughly $2 billion in overall issuance.
Local investors have felt penalised because they can’t hold sukuks in their available-for-sale portfolios. Has there been any change to this regulation?
Yes local investors can now hold them in their available-for-sale portfolios. The government changed the rules last year, effective this January.
And what about the overall domestic debt market? The government has been repeatedly criticised for not doing more to improve liquidity and the size of the domestic investor base.
There are several initiatives going on right now. In January, for example, we adopted the GMRA [Global Master Repo Agreement] so now banks and insurance companies can use this mechanism as part of their liquidity management.
The government has also just announced that pension funds and insurance companies must hold 30% of their portfolios in government bonds. At the moment the figures stands around 18%. This new directive will be implemented in stages.
We’re also thinking of issuing dollar-denominated bonds in the domestic market with tenors up to two years.
What about the fact that investors have to pay interest income on bonds? That’s been frequently cited as a major disincentive to invest in the bond market.
That’s still being discussed with the Ministry of Finance and tax authorities. It is something, which is under consideration.
Foreign investors have been pouring back into domestic bonds during the early months of the year. What do you think is driving this and will it last?
I think foreign investors see that our fiscal and monetary policy has been stable. Last year, GDP growth of 4.8% was not as strong as it has been in the recent past and tax revenues declined significantly, but the government managed the deficit and it didn’t exceed 3%.
The central bank has also been very helpful. It reduced the policy rate in the fourth quarter and again in mid-February by 25bp to 7%.
In the past the policy rate had to be relatively high to keep the currency stable. But inflation has declined and economic growth is accelerating. It’s given the central bank room to manoeuvre and it will reduce the cost of credit for corporate Indonesia.
I think this is just the beginning of an easing cycle.
What’s your view on Indonesia’s debt to GDP ratio?
It ended the year at 26.8%. We think it should decline slightly this year and over the next five years we have a 24% to 25% target.
What about your credit rating? You have Baa3 and BBB- investment grade ratings from Moody’s and Fitch but a BB+ non-investment grade rating from Standard & Poor’s.
S&P have us on positive outlook and have just visited the country. We’re hopeful they’ll raise the rating.
The agencies are always very hot on improving revenue collection. What’s the government doing in this regard?
We’ve been taking a number of initiatives, but the effects won’t be immediately clear given that declining economic growth impacted revenue collection.
The government is launching a tax amnesty. We hope this will draw companies and people who were previously outside the tax base and provide a solid base for the future.
