The Republic of Indonesia is preparing to begin marketing its first international bond issue in Hong Kong this Thursday under the joint lead of Deutsche Bank and JPMorgan. Presentations will then continue in Singapore, Europe and the US, for pricing around Thursday March 4.
The huge rarity value of the transaction combined with investors' desire for yield seems likely to ensure the same kind of rapturous response Pakistan met just over a week ago for its first new sovereign bond in seven years. Indonesia has not accessed the international debt markets since 1996 and already the leads are starting to manage market expectations by suggesting the prospective issue size might be increased from $500 million to $1 billion.
In terms of where a new 10-year deal might price, the sovereign's existing August 2006 bond does provide a rough if illiquid benchmark. This would suggest a new issue yield straddling either side of 7%. However, some market participants believe the yield could be pushed well into 6% territory and the most optimistic argue that the sheer rarity value of Indonesia's deal means the B2/B rated credit will price much closer to BBB+/A- rated Malaysia than anyone might initially think possible.
Indonesia's outstanding 7.75% August 2006 bond is currently quoted around the 4.15% mark to yield about 250bp over Treasuries or 199bp over Libor. Adjusting for the additional maturity and Indonesian curve equates to a Libor spread just above the mid 250bp level and taking into account 10-year Treasuries and swaps, assumes a rough yield of about 6.90% to 7.10%.
At these levels, Indonesia would come significantly through the three-notch higher rated Republic of the Philippines, whose January 2014 bond is currently yielding about 8.95% or 490bp over Treasuries and 430bp over swaps.
The most relevant Malaysian bond is the sovereign's 7.5% 2011 bond, currently yielding about 4.45% or 41bp over Treasuries and 58bp over Libor.
Indonesia has the same rating as Pakistan, which priced a $500 million five-year just over a week ago to yield 6.75% or 370bp over Treasuries and 335bp over swaps.
However, Indonesia has a far more dynamic credit profile than any of its closest rated peers. It is far more likely to get upgraded than Pakistan and is on a firmly upward trajectory, whereas the Philippines appears unable to stop an inexorable downward slide.
Virtually all of Indonesia's debt ratios rank superior to its immediate peers. During 2003, for example, analysts estimate that public sector debt stood at 76% of GDP, down from 96% in 2001. Pakistan, meanwhile, reported a 90% public sector debt to GDP ratio and the Philippines an estimated 76.3%.
Indonesia has also been able to manage a more stable fiscal position and government officials hope to achieve a balanced budget by 2006. During 2003, the deficit is estimated to have declined to 1.9% of GDP from 3.6% in 2001. In the Philippines the budget deficit came in at 4.5%.
On the revenue side, Indonesia has a more impressive track record improving tax collections. The country has seen tax collections rise from $18.1 billion in 2001 to $31.7 billion in 2004 (forecast).
In the Philippines, on the other hand, taxation as a percentage of GDP has consistently declined and the BIR has stuttered along, collecting $7.25 billion in 2001, $7.36 billion in 2002 and $7.25 billion in 2003, although last year it did beat its target for the first time in five years.
The only ratio where the Philippines shows some superiority is GDP per capita, which stood at $991 in 2002 compared to $819 for Indonesia and $473 for Pakistan.
Indonesia now stands at a new inflexion point in its debt financing history. There are elections in a couple of months and much depends on how the new government handles national finances following the country's departure from the IMF's Extended Fund Facility and the closure of IBRA at the end of February.
Between them, the two institutions have played a major role in stabilizing and then improving the country's credit ratios post financial crisis. The strength of investors' response to the sovereign's new bond issue may, therefore, be viewed as a sign of how much faith the market places Indonesia's ability to manage national finances on its own.
Because Indonesia is graduating from the IMF, the re-scheduling of its Paris club debt will also come to an end. This, in turn, will increase the country's amortization burden, with $3.1 billion coming due in 2004 and a further $4 billion between 2005 and 2008.
At the same time the government will no longer be able to rely on proceeds from IBRA to bridge a funding gap. Between 1999 and 2002, analysts say IBRA contributed about $15 billion to $19 billion to government coffers. In 2003, it is estimated to have contributed $2.3 billion.
So how will the government bridge the gap? The vast majority will come from increased debt financing either from multilateral sources, or the domestic and foreign debt markets. Therefore, while the new bond issue will have huge rarity value, it may not last for very long.
The Indonesian government is projecting a budget deficit of 1.2% during 2004. According to credit research provided to investors, JPMorgan says the government requires national funding of $10.5 billion in 2004 compared to $7.5 billion in 2003.
Quoting Ministry of Finance figures, the bank says $2.8 billion is needed to fund the deficit, $7.7 billion for debt servicing costs, $2.5 billion for principal re-payment of domestic debt and $5.2 billion for principal re-payment of foreign debt.
Funding will come from a variety of sources.
It will principally include: the CGI (Consultative Group on Indonesia), which has pledged $3.3 billion; domestic debt markets ($3.4 billion versus $1.4 billion in 2003); IBRA and privatization proceeds (about $1.2 billion); foreign debt markets ($500 million to $1 billion) and the RDI (Rekening Dana Investasi).
This is a fund that borrows at preferential rates from foreign creditors and then on-lends to state-owned industries at a spread. It should provide a further $2.2 billion.
