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Key Test Looms for Indonesian Bonds Amid Rising Debt Supply

Marcus Wong
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Key Test Looms for Indonesian Bonds Amid Rising Debt Supply

(Bloomberg) -- Indonesia’s next bond sale in early June may go a long way to show whether demand from local banks cashed up by the central bank’s liquidity measures will be enough to offset the specter of rising debt supply.

Local lenders have become the key buyers of the nation’s sovereign debt since the coronavirus crisis spurred foreign investors to cut their holdings amid a sell-off in emerging-market assets. With the government boosting spending to tackle the pandemic, the tug-of-war in Indonesia’s bond market will have critical long-term ramifications for the nation’s financial health.

The increase in government spending will probably see the budget deficit widen to 6.27% of gross domestic product this year, Finance Minister Sri Mulyani Indrawati said on Monday, just six weeks after the administration projected it would be 5.07%. The target before the pandemic was only 1.76%.

Average monthly issuance at debt sales may now climb to the top end of the finance ministry’s target range of 70 trillion rupiah ($4.8 billion) to 90 trillion rupiah, said Jennifer Kusuma, senior rates strategist at Australia & New Zealand Banking Group Ltd. in Singapore. This is to accommodate the estimated 175 trillion rupiah in extra financing the government requires if it’s to be fully raised from the rupiah bond market based on the 6.27% of GDP target, she said.

Foreign funds haven’t been helping. They’ve cut their holdings to about 30% of total government debt outstanding, the lowest in eight years, from as high as 39% in January. Overseas investors are being deterred by risk aversion stemming from the virus outbreak, and also the relatively expensive rupiah hedging costs. The spread between one- and 12-month non-deliverable forwards remains close to 1,000 basis points.

Liquidity Boost

While there are plenty of negatives, the central bank’s raft of measures to boost liquidity announced on April 14 have so far helped support the bond market. Among other steps, Bank Indonesia expanded its term-repo facility and cut the reserve ratio requirement for banks.

Benchmark 10-year yields have dropped to 7.54% from as high as 8.38% in the middle of March, according to data compiled by Bloomberg.

Bank Indonesia’s surprise decision on Tuesday to keep interest rates on hold can also be seen as a bond positive in that it helped preserve some of the yield premium on local debt. The move took on even greater significance Friday after the Reserve Bank of India unexpectedly cut its own benchmark by 40 basis points at an unscheduled meeting.

Indonesia’s most recent sale of conventional bonds on May 12 garnered total bids from investors of 72.7 trillion rupiah, the highest level in three months and more than three times the 20 trillion rupiah of debt initially for sale. Analysts have suggested a lot of the demand was from local banks responding to the additional liquidity measures.

While the trend at recent auctions has been positive, the prospect of steadily mounting supply may eventually bring about a reaction. That is why investors will be closely watching the results of the next sale on June 2.

Before then though, onshore bond markets will be closed for Hari Raya celebrations and will only reopen on Tuesday.

What To Watch

Thailand will release current-account data on Friday after the March number shrunk to the lowest in 10 months. The nation’s trade outlook may not improve anytime soon following the government’s announcement Friday that it will extend the nationwide state of emergency for another monthThailand will issue 16 billion baht ($503 million) of 10-year bonds (LB29DA) and 12 billion baht of 20-year debt (LB386A) on Wednesday. The previous sale of five-year notes (LB24DB) on May 13 drew a bid-to-cover ratio of 3.3The Philippines is targeting a 30 billion peso ($593 million) five-year bond sale on Wednesday

(Updates to add Thailand’s extension of the lockdown under What to Watch subhead)

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