Indonesia May Sell Dollar Bonds to Local Market to Curb Risks

Indonesia may offer dollar- denominated conventional and Islamic bonds targeted at local investors this year, seeking to curb price swings caused by capital outflows. 

“In the next issuance of global bonds, we might want to increase the allocation for domestic investors, or we might issue entirely in the domestic market,” Rahmat Waluyanto, director-general of the Finance Ministry’s debt management department, said in an interview in Jakarta yesterday. “We need to be vigilant as this can cause some potential risks, especially if there is any trigger to market volatility.” 

Dollar debt of Southeast Asia’s largest economy has handed investors a gain of 13.8 percent in 2010, tying with the Philippines as third-best in the region after Thailand and Pakistan, indexes compiled by HSBC Holdings Plc show. Indonesia plans to sell 200.6 trillion rupiah ($22.1 billion) of local and foreign debt in 2011 to fund a budget deficit estimated to reach 124.7 trillion rupiah, 1.8 percent of gross domestic product. 

The government may not offer rupiah bonds to global markets, unlike neighboring Philippines which has already sold peso bonds twice overseas in the past four months, said Waluyanto. The increase in foreign ownership of rupiah government bonds to 30.8 percent as of Jan. 10 from 0.5 percent in 2003 is a consideration, he said.

Unfriendly Policy

The foreign-currency bonds to be offered this year will include dollar conventional and Islamic bonds, which may be issued within the first half, and samurai securities in the second half, he said. Islamic bonds, known as sukuk, comply with Shariah law by using asset returns to pay investors instead of interest. 

The country raised nearly $3 billion of global securities last year, including $2 billion of dollar bonds and 60 billion yen ($721 million) of samurai notes denominated in Japan’s currency. The amount sold was lower than the $4 billion in 2009. The government usually sets aside 5 percent of the overseas bonds for local investors to buy, Waluyanto said. 

“We can’t prohibit foreign investors from buying our bonds,” Waluyanto said. “This is unfriendly market policy. Instead, we need to counterbalance by developing our own domestic investor base by diversifying instruments.” 

Indonesia’s rupiah debt returned 21 percent last year, the top gainer among 10 Asian government debt markets compiled by HSBC. The currency rose 4.6 percent.

Dollar Liquidity

Foreign ownership in the government’s domestic debt increased 87.76 trillion rupiah last year to 195.76 trillion rupiah, according to the finance ministry. “The spirit is to give more opportunities to domestic investors given that the liquidity in the U.S. dollar is quite big because of the heavy capital inflows,” Waluyanto said. 

Standard & Poor’s raised the country’s rating in March to BB, while Moody’s Investors Service on Dec. 1 placed its Ba2 ranking on review for a possible upgrade, citing an improving economy and state finances. Both rank Indonesia two levels below investment grade. Fitch Ratings assessed Indonesia at BB+, the highest non-investment ranking. 

President Susilo Bambang Yudhoyono said in his annual state-of-the-nation address on Aug. 16 that he is seeking to expand the Indonesian economy by as much as 7.7 percent and create 10.7 million jobs by the end of his second term in 2014.Source: Bloomberg