BENGALURU (Reuters) – Foreign investors are unlikely to rush into Indonesian markets until they pay down more debt or give hard evidence they won’t push the central bank for longer-term funding government borrowing, according to fund managers.
External demand for government debt in Southeast Asia’s largest economy, normally prized for its 7% yields that are increasingly rare even in the world’s emerging markets, has fallen since March, with holdings foreigners hit their lowest level in ten years in August.
Such inflows are essential for Indonesia as it strives to fund government programs to fight the coronavirus and revive an economy weakened by months of global and domestic restrictions.
But proposals tabled in parliament this month to increase ministers’ influence over the strategy of Bank Indonesia (BI), at a time when it is helping fund emergency government borrowing, have made it harder to secure investor confidence.
The bill is still at an early stage and deliberations may take months. While politicians have played down threats to the bank’s independence, they also say measures in the bill to ensure it will help buy public debt in an emergency are possible.
“Since the very large outflow we saw after the initial peak of COVID…flows have really been very lackluster in terms of foreign appetite for Indonesian bonds,” said Stuart Ritson, debt portfolio manager of the markets. emerging markets at Aviva Investors.
“Certainly headlines like the ones we’ve seen in recent weeks questioning central bank independence are likely to prompt investors to be more cautious in allocating capital.”
Rating agency S&P Global told Reuters last week that Indonesia would have to carefully manage the proposed changes to avoid pressure on its sovereign rating.
Encouraged by the normalization of central bank bond purchases in major economies over the past decade, rating agencies and investors have given governments in developing countries more leeway this year on measures that would normally be taboo. .
Bank Indonesia is already backing some of Jakarta’s targeted bond issues.
But in the longer term, such programs carry the risk of dragging governments into additional debt that the International Monetary Fund advises against, worried about the kind of defaults and inflation that have plagued Hungary, Argentina, Ecuador and Lebanon.
To this end, the IMF warned last month here Indonesia to manage its debt as it tackles the pandemic, although its public debt as a percentage of GDP remains well below that of many of its emerging market peers.
“From an economist’s point of view, the proposed revision will be unequivocally bad because it would mean approving debt monetization,” said Toshinobu Chiba, chief fixed income portfolio manager at Nissay Asset Management in Tokyo.
Thanks to years of rebuilding its reputation from a 1990s boom, Indonesian 10-year bond yields are well below those of South Africa, Brazil and Turkey.
Chiba said that while he was bullish on Indonesian fixed income, yields would need to rise to levels not seen since early July for him to be comfortable buying.
“Our position is neutral at the moment, but 10-year bonds would be attractive if their yield reached, say, around 7.2%,” he said.
Reporting by Shashwat Awasthi, Nikhil Kurian Nainan in Bengaluru, Gayatri Suroyo in Jakarta and Hideyuki Sano in Tokyo; Editing by Patrick Graham and Nick Macfie