Slowing economic growth, the rupiah at a 17-year low versus the dollar and accelerating inflation have all fueled concerns that foreign investors could pull out of Indonesia.
Subsequently, costs to insure Indonesia’s bonds against default have reached 2015 highs. Five-year credit default-swaps on the debt jumped 19 basis points to 180 since the beginning of June.
Foreign investors’ interest in Indonesian bonds has slowed significantly in recent months. The country is finding it increasingly difficult to sell its debt as investors have become cautious of parking their money in the archipelago — four of the last five sovereign auctions failed to meet their targets.
The country’s total foreign debt stands at US$298 billion, much of which is going toward financing large infrastructure projects, according to data from Bank Indonesia (BI). Foreign contributions stand now at 38.5% of the national debt, the highest ratio in Southeast Asia, which leaves the market vulnerable to outflows.
Most of the debt is due in more than a year’s time, sparing the country from risks of a liquidity crunch at least during the remaining quarters of 2015.
Indonesia Remains a Risky Investment for the Short Term
The Bank of Indonesia forecasts that Inflation will remain above 7% through September as the yearly occurring El Niño weather pattern awaits.
The rupiah has led the decline of ASEAN’S currencies falling to 13,385 a dollar, its weakest trading value since August 1998. 13.385 to a dollar is an important value. Foreign investors who pumped 46 trillion rupiah (US$3.4 billion) into Indonesian debt during January’s and February’s bond auctions, will start to incur losses on their investments below 13,400 a dollar according to PT Mandiri Sekuritas, a unit of the country’s largest lender.
The Bank of Indonesia truly is caught in a difficult place, for the rupiah’s descent to a 17-year low is limiting its scope to support the economy by cutting interest rates.
Lowering rates to stimulate a recovery seems impossible now, as the domestic currency’s response would be drastic. With a rising risk of a global currency war on the back of a mighty dollar rally, pressures on the central bank will only keep on mounting.
Based on optimistic predictions, the government has achieved 49% of its full-year bond sales target. However, as the Indonesian economy is taking a pause —the country’s GDP is predicted to continue to slow at 5.3%—, President Joko Widodo’s plan to boost tax revenue by 30% in 2015 is looking tough to meet.
Ergo, the issuance goal will very likely have to be raised during the second half of 2015, says Handy Yunianto, manager of fixed-income sales at Mandiri Sekuritas, Jakarta.
Furthermore, that prediction could be upset by El Niño. Indonesia, along with India, will be most harmed in Asia by the weather pattern as 18% of GDP is driven by agriculture, forestry and fisheries.
It seems likely that investors will keep demanding higher yields and could readjust their positions, at least going into the near future. Additionally, large supply pressures for investors will continue to exist going forward.