Asian bond outlook: Asean re-awakens

Southeast Asia and India were the bright spots in the debt capital markets in 2018. Could this be the year they emerge from China’s shadow?
Will elections disrupt the issuance calendar?
Will elections disrupt the issuance calendar?
 
One of the brightest spots for 2019 debt capital markets issuance is Southeast Asia and India according to investment bankers who expect both issuer and investor interest to pick up.
 
Typical is the view of Amit Sheopuri, co-head of Asia Pacific debt capital markets at Citi
 
“We’re very bullish on South and Southeast Asia,” he said. “There was a pick up of activity from Indonesian quasi-government credits during 2018 and we expect this to continue into 2019.”
 
ANZ’s fixed income research team calculates that Southeast Asian corporate borrowers issued just shy of $19 billion in dollar-denominated debt during 2018, up from $15.87 billion in 2017. 
 
The uptick can be partly explained by a growing number of sizeable liability management exercises by Indonesian quasi-government credits such as power producers PT Perusahaan Listrik Negara and PT Pertamina.
 
“In the past, Indonesian state-owned borrowers thought liability management was a sign of weakness,” said one Asian debt capital markets head. “They now realize that it’s the opposite and we expect to see a lot more of this kind of financing in the future.” 
 
There are, however, two caveats for the whole of Southeast Asia. 
 
One concerns elections, which are being held across four Asean countries. 
 
They begin with Thailand in February, followed by Indonesia in April, before moving on to India and the Philippines in May. It is also possible that Singapore will hold elections in 2019.
 
The second caveat concerns the wider emerging markets and the prospect of it being hit by renewed turmoil should the US raise rates higher and faster than expected. Indonesia, in particular, is always vulnerable to this kind of contagion.
 
The usual transmission mechanism is its currency and fixed income analysts argue that if it starts to come under pressure again, then so will many of the country’s high yield credits, which are still trading at very wide levels. 
 
Chief among them is Indonesia Stock Exchange-listed tire manufacturer Gajah Tunggal.
 
It remains the focus of investor concern given corporate Indonesia’s long history of foreign exchange mismatches. As a result, its 8.375% August 2022 bond currently yields 14.23%: almost double the level at which it started 2018. 
 
JP Morgan, for one, believes the general spread widening is overdone. It describes the market as oversold and full of cheap pickings. 
 
“We believe that valuations for Indonesian high yield corporates are starting to look interesting,” its Asian fixed income research team wrote in their 2019 outlook. “While we recognize that increased macro headwinds could be a drag on fundamentals, we believe that most issuers should be able to keep their credit profiles intact.”
 
Debt capital markets bankers also expect no major surprises from Indonesia’s forthcoming presidential and general elections. And they applaud Bank Indonesia for the way it has handled the EM spillover effects which have affected the country.
 
“The Indonesian government is just treating this as the new normal and getting on with business,” Sheopuri commented. 
 
Some bankers expect more domestic borrowers to turn onshore for funding. 
 
“We’re expecting a lot more rupiah borrowing to replace dollar funding,” one remarked. “Onshore liquidity is very strong and a fair few domestic funds are reaching their foreign currency caps for quite a few credits.”
 
Others such as CIMB’s head of capital markets, Nor Masliza Sulaiman, note that a growing number of corporates are diversifying their funding sources to other Asean domestic bond markets. 
 
The region’s other bulwark borrower, India, had a very quiet year in 2018. But bankers and fixed income analysts expect this to change during 2019 on the investment grade side at least. 
 
Derek Armstrong, head of Asia Pacific debt capital markets at Credit Suisse, said that greater market stability should facilitate increased activity, “although at higher pricing levels than we’ve seen in earlier years.”
 
HSBC’s head of Asian fixed income research, Dilip Shahani is also bullish, particularly on the front-end of the curve in both India and Indonesia. He believes that India will be well-supported by “the increase in the central bank’s bond buyback operations, while Indonesian bonds may receive an additional boost from an impending reduction in investors’ withholding taxes.”
 
Analysts also note that both countries will benefit from lower oil prices. 
 
The other country which had a very quiet 2018 was Malaysia thanks to the seismic aftershocks of its election result in May. It took until October for Tenaga to bring the first dollar-denominated issue from the country after Mahathir Mohamad and his Pakatan Harapan coalition swept into power.  
 
Angus Salim Amran, head of financial markets at RHB Investment Bank, predicts that issuance will also pick up in 2019, both domestically and internationally. 
 
“There’s now more certainty about which projects the government will fund,” he commented. “So we expect to see more corporate issuers, although this might put some pressure on domestic spreads, which are very tight due to 2018’s undersupply.”
 
Gaetano Bassolino, head of Asian capital markets at UBS, puts forward a similar argument. “There’s been undersupply from Southeast Asia and limited defaults,” he remarked. “That bodes well for uptake.”
 
A second reason for issuers’ absence from the bond markets is the plentiful liquidity available within the syndicated loan markets. Bassolino says that, in some cases, investment grade borrowers are saving up to 200bp via the loan market. 
 
“Local liquidity is still very strong in Malaysia and Thailand,” he explained. “But it is getting a bit tighter and there should be more of a convergence between bond and loan pricing.”
 
This is one of the main reasons why debt capital markets bankers expect a stronger showing from the Philippines in 2019 as well. Last year there were just two perpetual dollar-denominated issues; from Petron Corp and ICTSI.
 
Both deals were executed in January 2018. This was perfect timing from the two issuers’ point of view, but less so from investors’ perspective given that they are both currently trading seven to eight points below par. 
 
That pricing dynamic is not expected again for some time to come. 
 
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