Indonesia Sees Debt Market Stabilizing, Central Bank Signals Rate Hike

A rise in Indonesian bond yields is unavoidable given the current global situation, but the Ministry of Finance believes the market will stabilize and is preparing alternatives for financing in the meantime, a senior official said on Friday (11/05). (Reuters Photo/Shohei Miyano)

By : Maikel Jefriando and Gayatri Suroyo | on 3:26 PM May 11, 2018
Category : Business, Economy

Jakarta. A rise in Indonesian bond yields is unavoidable given the current global situation, but the Ministry of Finance believes the market will stabilize and is preparing alternatives for financing in the meantime, a senior official said on Friday (11/05).

Indonesian markets have been hit harder than others in Asia in the past three months as US yields rose and the dollar rallied, deepening concerns about capital outflows.

Its sovereign bond yields have risen across the curve while the rupiah fell to its lowest since December 2015, as investors sold off risky emerging market assets.

The 10-year Indonesian bond yield hit 7.340 percent earlier on Friday, the highest since March 2017, before falling to 7.299 percent.

The Finance Ministry has sold fewer bonds than targeted in in latest auctions and on Tuesday it turned down all bids – worth Rp 7.19 trillion ($512.8 million) – because investors were asking for "out of ordinary" yield levels.

"For yields to return to 6.3 percent would be hard, but we're comfortable that the movements [in global markets] are in line with ours," Luky Alfirman, the head of the ministry's financing and risk management office, told a news conference, referring to the yield of the benchmark 10-year bond.

Finance Minister Sri Mulyani Indrawati said on Wednesday that the government had sufficient cash for it to be able to wait until the market reaches a new equilibrium.

The ministry also invited bond dealers and big investors for an "urgent" meeting at 2 p.m. local time on Friday to discuss market updates.

The government's strategy for 2018 bond issuance was to front-load the sales, Luky said. So far, around 45 percent of the 846.4 trillion rupiah total bond target for the year has been issued, according to data from the ministry.

Alternatives for raising money are being prepared, which includes multilateral loans, private placement of bonds in both rupiah and foreign currencies and sale of yen-denominated bonds, Luky said.

Separately, Bank Indonesia said the rupiah's level is not reflecting fundamentals and the central bank has ample room to adjust its benchmark policy rate, giving another hint it may raise rates to support the currency.

The central bank has kept the key rate at 4.25 percent since September last year, following its 200 basis point rate cuts in 2016 and 2017. Its next policy meeting is on May 16-17.

Bank Indonesia's comments helped the rupiah firm and lowered bond yields on Friday, said Ahmad Mikail, an economist at Samuel Sekuritas in Jakarta.

The rupiah strengthened 0.4 percent on Friday to trade at 14,020 to the dollar. The stock market extended its rebound, gaining 1.8 percent on Friday.

"The market has priced in a BI rate hike. When it raises the rate, yield may even come down," Ahmad said.

The rupiah is vulnerable to outflows because of a high percentage of foreign ownership in Indonesian bonds. The country runs a current-account deficit that is partly financed by portfolio inflows.

The central bank governor said in April that he expects the country's current-account deficit to widen to between 2.2 percent and 2.3 percent of gross domestic product in 2018, slightly higher than its earlier estimate of 2.1 percent and compared to 1.7 percent in 2017.

The first quarter's balance of payments data, including current account, is due later on Friday.

Reuters

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