The Republic of Indonesia launches roadshows today (March 17) for a new $1 billion 10-year benchmark. Under the lead management of Citigroup, Deutsche Bank and UBS, two government teams will lead presentations ahead of pricing next Wednesday or Thursday in New York.
Team one led by Minister of State Owned Enterprises, Sugiharto, will cover the West Coast of the US, while team two led by capital markets supervisory agency chief, Anwar Nasution, will visit London before both teams converge on the US East Coast.
The Republic has a very clear pricing benchmark since it is coming to the market almost a year to the day since its market re-opening $1 billion 10-year deal of March 2004. However, whereas the outstanding deal priced into a strong market and traded into a weak one, the deal new is facing the opposite problem. Having traded down to historically tight levels, Asian credit spreads have sold off over the past week following volatility in the US Treasury market where spreads have backed out 20bp.
If the negative momentum continues, this means the Republic could end up having to pay 30bp to 50bp more than it would have done a week ago should it still decide to go ahead and print a deal. But for investors who view the recent sell-off as a temporary phenomenon, the deal may offer an unexpected opportunity to build a sizeable position during a moment of weakness.
Before the recent sell-off, bankers say the ROI's 6.75% March 2014 deal had hit a low of 6.3% equating to roughly 140bp over Libor. Yesterday (Wednesday) it was trading back out at 6.6% or 170bp over Libor.
Bankers say the curve could be worth up to 20bp meaning a new deal would currently be looking at a spread just south of 7% depending on what the sovereign's true size expectations are.
Its 2004 deal attracted an order book of $4 billion and the Republic made a strategic decision to balance distribution between all three continents and minimize allocations to Indonesia where there had been strong demand. In the end Indonesian accounts took just 7% of the deal.
In the interim period, the Philippines has closed the trading gap between the two despite the fact that the former remains on a downward ratings trajectory, while the latter is expected to get upgraded by all the agencies at some point this year. In March 2004, there was a 200bp differential between the ROP's January 2014 bond and the ROI's March 2014 bond. Today that differential is more like 160bp.
Analysts almost universally expect Indonesia's rating to be upgraded this year from its current B2/B/BB- level. It is on positive outlook from all three agencies and has already been upgraded once by Fitch in January.
Since a new government took office last autumn, officials have been applauded for their new fiscal measures, which should help achieve a balanced budged in 2006. In 2005, the government is forecasting a deficit of 1.3%, up slightly from earlier forecasts of 1% because of the Tsunami, but down from 1.6% in 2004.
But some analysts believe the government may be able to bring the final figure down further thanks to two recent fiscal initiatives. A couple of weeks ago the government announced its intention to raise fuel oil prices for diesel and gasoline, but would leave the more politically sensitive kerosene price untouched.
Scrapping some of fuel oil subsidies should save the government up to $2 billion a year (Rp15 trillion to Rp20 trillion), equivalent to just over 1% of GDP.
So too, the government has indicated its acceptance of a Paris Club initiative to defer $2.6 billion debt payments in 2005. This will give it another 1% of GDP to play with.
The Paris Club initiative came in the wake of the Tsunami disaster and crucially the country's creditors did not impose their usual condition that a debtor nation must also enter into an IMF programme, or apply comparable treatment towards private sector creditors.
The Republic's debt indicators also remain on a downward trend, with external debt to GDP falling from a high of 156% in 1998 to 53% in 2004.
Analysts further conclude that there may be surprises on the upside following the recent release of FDI figures. Inflows during January and February amounted to $3.24 billion, higher than the whole of 2004 combined.
