Indonesia has long been a focus for foreign investors, having come a long way since its wrenching experience during the Asian financial crisis. Recently, it has burnished its status as a borrower and transformed from basket case to market darling, prompting FinanceAsia to name Indonesia its borrower of the year for 2011.
Investors may clamour for its paper, but the country still falls short of full investment-grade status. Both Moody’s and Fitch have upgraded Indonesia, but Standard & Poor’s has kept its sovereign rating at BB+, one notch below investment grade, which has meant that some emerging-market funds with mandates to buy investment-grade paper may not be able to buy the sovereign’s local currency bonds.
At the inaugural FinanceAsia and AsianInvestor Southeast Asian debt conference, held in Singapore last week, Loto Srinaita Gintang, director of government debt securities at Indonesia’s ministry of finance, expressed hopes that S&P would soon upgrade the sovereign’s rating.
“We have got investment-grade rating from Fitch and Moody’s, and we are waiting for S&P, still waiting. Hopefully, we can get it soon,” said Loto.
Later, she took on a more combative tone. “For S&P, the reason they have not upgraded us so far, the constraints are lower per capita income, structural and institutional impediments to higher economic growth, high private sector external debt, shallow capital markets... you assess whether it is okay or not?” asked Loto, drawing laughter from the audience.
In an earlier panel, Elena Okorotchenko, Asia-Pacific head of sovereign and international public finance ratings at S&P, cited the fact that Indonesia is “still vulnerable to external shocks” as one of the reasons for holding off from an upgrade.
She said that other factors holding Indonesia back are its shallow domestic capital markets, which have resulted in high external debt levels of Indonesian companies, and noted that Indonesia “is known to take two steps forward and one step back”.
During her presentation, Loto pointed out that Indonesia has weathered the continuing eurozone crisis better than the 2008 subprime crisis. For instance, in 2008, credit default swaps on Indonesia’s bonds soared to a whopping 1,200bp, but during the subprime crisis, the impact on CDS was “very minimal”, she said.
During the past few years, Indonesia’s borrowing costs have also fallen dramatically — perhaps as much a reflection of the tremendous wall of liquidity chasing limited sovereign paper in Asia, as it is of its improving fundamentals.
“In 2005, for 10-year paper we had to pay more than 15% while during the crisis in 2008 we had to pay around 20%,” said Loto. “Currently, for 10-year, we only need to pay around 5.78%. That is a significant decrease in the government’s cost of borrowing.”
Sudden capital outflows have always been a concern for Indonesia’s domestic bond market — particularly since foreign investors hold nearly 30% of Indonesian local-currency government bonds, which is high compared to its regional peers. But in September 2011, when there was a sharp outflow from the domestic government bond market, the effect on yields was only moderate.
According to Loto, during the two-month period from September to October 2008, foreign investors sold off Rp14.2 trillion ($4.5 billion) of Indonesian government securities. This led 10-year yields to soar by almost 900bp to reach a high of more than 20%.
By contrast, in September 2011, when there was a similarly large capital outflow of about Rp38.8 trillion ($4.1 billion), yields rose by just 41bp. The country has put in place a bond stabilisation framework — through which the central bank and state-owned enterprises buy bonds to offset any sudden outflows.
On the funding front, Indonesia has funded 76.48% of gross issuance required in the 2012 budget and has plans to tap the samurai market and global bond market this year.