If India’s experience of selling local-currency notes in the overseas market is anything to go by, Indonesia’s plan to issue Komodo bonds may not be all plain sailing.
The sovereign is mulling a sale of offshore rupiah-denominated bonds, and three state-owned infrastructure companies are considering issuance in coming months. A narrow investor base and fluctuations in the rupiah may be concerns for investors in these new notes, which President Joko Widodo has named after Komodo dragons, the big lizards found in eastern Indonesia.
Some foreign funds say the bonds would give good exposure to Indonesia, where the prospects for economic growth and the fiscal situation are improving, as long as they’re compensated enough. In India, the first Masala bond sale took almost a year since the central bank approved the new issuance as issuers were reluctant to pay a premium for overseas borrowing in rupees.
“I can see the merit in the government wanting to try this, as it makes sense to try and harness local currency from the global markets,” said Adam McCabe, head of Asian fixed income at Aberdeen Standard Investment in Singapore, who already invests in sovereign and company rupiah debt onshore. But liquidity is “quite a substantial concern,” he said.
He said yields would need to be 25-50 basis points higher than local corporate notes for him to be interested in buying Komodo bonds.
After trading in a fairly narrow range for most of the year, Indonesia’s currency has fallen 2.3 percent over the past month, while one-month implied volatility reached a seven-month high at the end of September. Foreign funds have pulled a net $815 million from Indonesian bonds in October through Monday after 10 straight months of inflows and have been net sellers of local stocks for 29 days in a row through Tuesday.
Demand is still likely to be “quite robust,” despite the rupiah’s recent drop, because economic expansion is on a gradual upswing, said Raphael Mok, a Singapore-based senior analyst at BMI Research, a unit of Fitch Group. Indonesia’s external and fiscal positions have strengthened considerably over the past few years, he said.
PT Jasa Marga, a toll-road operator, has said it plans to offer Komodo bonds as soon as next month. Construction company PT Wijaya Karya said it wants to sell the notes this year, while electricity utility PT Perusahaan Listrik Negara is aiming for the first quarter of 2018.
These time-frames may be optimistic. Bank Indonesia Assistant Governor Dody Budi Waluyo said on Friday the central bank was supportive but wanted to study the impact on the exchange rate. The Financial Services Authority is drafting a rule to allow offshore rupiah bonds, Deputy Commissioner Nurhaida said by text message on Monday.
Here are more views from fund managers:
Woon Khien Chia, a Singapore-based fund manager at Nikko Asset Management Ltd. “We would consider investing in these securities, if and when they come to the market. It’s good that the government is making an attempt to diversify its funding base” The notes, especially in the case of a sovereign issue, will probably be included in global indexes and they should be tax-free, she said Brad Gibson, a fund manager at AllianceBernstein LP in Hong Kong Would be “opportunistic at best” and the yield would need to be around 25 basis points higher than similar five-year local notes to make up for the lack of liquidity It would be good to see policy makers in any market “spending more time developing transparency, liquidity and depth in their domestic markets,” before launching local-currency offshore debt Ken Hu, chief investment officer at Invesco Hong Kong Ltd. “The economic reform momentum of the country is still very strong,” said Hu, adding that he’s bullish on Indonesia, along with India and China “On the other hand, I would suffer from the liquidity because such bonds would have less liquidity than the onshore government bonds”
There’s probably less pent-up demand for rupiah exposure, compared with India, given that there are no quotas for buying Indonesian debt, said AllianceBernstein’s Gibson. Indian authorities adjusted the rules last month to allow more foreign investment. Issuers have priced 219.3 billion rupees ($3.4 billion) of Masala bonds since the first sale in July 2016.
While global investors want access to these markets, it’s unclear what demand would be like for Masala or Komodo bonds in times of emerging-market volatility, Gibson said, adding that there’s no domestic investor base for foreign funds to sell to.