Indonesia sailing toward upgrade as last major Asian junk debt

Indonesia’s status as Asia’s last major economy without a full-investment grade may be near an end, boosting the appeal of the region just as other emerging markets such as Brazil and Poland suffer downgrades.
State-Owned Enterprises Minister Rini Soemarno said in Jakarta last week she expects an S&P Global Ratings upgrade in June, after the finance minister said May 11 the firm’s officials were impressed during a visit. Indonesia’s international bonds  returned 10.1 percent this year, while its domestic bonds advanced 10 percent, both the best in emerging Asia, JPMorgan Chase & Co. indexes show. The cost to protect sovereign debt against non-payment dropped the most in Asia after Vietnam, sliding 42 basis points to 193 basis points.
Schroder Investment Management Ltd., Aberdeen Asset Management Plc and Natixis Asset Management are all predicting an upgrade as President Joko Widodo seeks to pay for better infrastructure by cutting fuel subsidies. Philippine peso sovereign debt rallied 7.7 percent this year as an incoming government sought to defend its full investment grade status, Bloomberg indices show. Bonds in Brazil delivered losses this month as its rating was cut, while the Polish zloty tumbled after the nation was downgraded in January.
“Once you become fully investment grade, it triggers a certain category of clients who were really excluded,” said Rajeev De Mello, who oversees about USD10 billion as head of Asian fixed income at Schroder Investment in Singapore. “When we saw other countries move into that situation it usually had an impact.”

Indonesian rupiah banknotes

Indonesia, Southeast Asia’s largest economy, is the biggest issuer in the region of dollar bonds since 2011, raising a total of $31.75 billion, data compiled by Bloomberg show. The officials from S&P, which assigns Indonesia the highest junk grade BB+, were impressed with reform efforts, Finance Minister Bambang Brodjonegoro said on May 11. Fitch Ratings and Moody’s Investors Service have rated Indonesia at investment grade since late 2011.
S&P’s views on Indonesia haven’t changed, according to Emi Nakata, the company’s spokeswoman. The company assigned a positive outlook since May 2015.
Indonesian debt has room to rally in the event of an upgrade. In 2011, the nation’s 10-year dollar bonds were trading at similar levels to that of the Philippines. The yield on securities issued by its peer are now 144 basis points lower than Indonesia’s.
Indonesia’s local bonds have attracted $4.3 billion from overseas funds after its central bank cut interest rates three times this year and said on May 25 it may loosen policy next month if the economy remains stable.
“We remain long rupiah bonds on the basis that monetary policy will remain accommodative,” said Edwin Gutierrez, who helps oversee about $11 billion as head of emerging-market sovereign debt at Aberdeen Asset in London. “The upgrade should bring in further buyers incrementally.”
The stability in Indonesia’s currency this year has enhanced the appeal of domestic bonds. The rupiah has gained 1.7 percent this year, after losing 35 percent in the previous five years. The local 10-year yield is at 7.8 percent, the highest rate among major Asian peers and almost double the 4 percent rate offered by its international notes.
Indonesia will “soon” get a rating boost from S&P, said Brigitte Le Bris, the Paris-based head of emerging-market debt and currencies at Natixis Asset, which oversees $372 billion.
“We are positive on local bonds,” she said. “Inflation should remain under control, Bank Indonesia is on easing mode and rates are offering some relatively high carry.” Lilian Karunungan, Bloomberg