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To investors focused on emerging markets, dollar-denominated bonds from Indonesia look as appealing as one of the nation's famous beaches – and issuers have been only too eager to sate that demand.
A long-awaited upgrade of the sovereign credit rating from junk status and a global environment of low interest rates have lured investors to Southeast Asia's biggest economy and driven a record level of debt issuance from the archipelago in the first nine months of this year.
In the first nine months of 2017, issuance of Indonesian G3-currency bonds surged 91% year-on-year to $15.7 billion, data compiled by Dealogic shows. That's a record level for the first nine months of any year in the country.
“From a foreign perspective, the buying into Indonesia does suggest a better risk-reward profile than many other Asian DM (developing markets) credits, with the added tailwind of improving sovereign credit fundamentals,” Todd Schubert, head of fixed-income research at Bank of Singapore, told FinanceAsia.
Given defaults are low globally and the US economic picture suggests big swings in rates are unlikely in the near future, investors are willing to take on more credit and duration risks in the search for yield. In general terms, Indonesia's high-yield issuers pay a yield of 7 to 8%, or about 200 bp higher than what their Chinese counterparts offer.
"There is not a whole lot of value anywhere," a fixed-income trader in Singapore told FinanceAsia. "A credit ratings upgrade helps Indonesian corporate issuers lower their funding costs."
"The action lowered the funding cost of a high-yield issuer by 50 to 100 basis points," the trader added.
In May S&P upgraded Indonesia’s sovereign credit rating from “BB+” to “BBB-“, matching the ratings awarded by its peers, Moody’s and Fitch five years ago, to the Southeast’s largest economy. That took Indonesia out of the junk status it had been stuck in since the Asian financial crisis of 1997-98 and reflects Indonesia’s strong fiscal position under the government of President Joko "Jokowi" Widodo.
The uplift allows Jakarta to sell foreign debt to a wider group of investors in developed markets, who allocate their capital based on the agency’s credit rating.
In turn, investor appetite has encourage Indonesian corporates to make their first forays into the US dollar-bond market.
“Global investors are more receptive to first-time issuers in Indonesia because they are eager to take more risks in exchange for higher returns,” said a senior debt banker with a US bank.
Debut issuers from Indonesia sold $1.325 billion of US dollar debt this year, compared with only $100 million was raised in one deal the entire last year, Dealogic’s figure shows. At least five newcomers tapped the market.
In January, Pan Brothers, a B1/B rated garment manufacturer, raised $200 million from its international bond debut, paying a yield of 7.75%. About eight months later, Geo Energy Resources, a Singapore-listed coal miner, increased its bond issuance to $300 million from $250 million, suggesting signs of risk appetite for the troubled sector.
“The response to debut names has been a strong endorsement of what the Jokowi administration has done in the past few years,” the banker said.
Strong buffers
Fund managers also say an improvement in the country’s economic fundamentals and a rise in foreign-exchange reserves offer buffers to potential outflows when the US Federal Reserve starts lifting the interest rates again.
Indonesia's second-quarter GDP growth expanded 5.01%, making it one of the fastest-growing economy in the region but still falling short of Jokowi’s 7% target. The country held more than $120 billion of foreign-exchange reserves as of June, about 12% of its GDP.
In June last year, S&P declined to upgrade the country’s sovereign rating, citing weak fiscal revenue and worsening corporate credit quality. Since then Jokowi reshuffled his cabinet and appointed a former managing director of the World Bank, Sri Mulani Indrawati, as its finance minister. Earlier this year, FinanceAsia named her Asia's finance minister of the year.
“With the improving political and macroeconomic backdrop over the past couple of years, this has resulted in a greater international buying base looking to benefit from improving sovereign credit momentum,” Schubert said.
