Return of investor confidence in Indonesia?

Indonesia conducted two rupiah-denominated bond sales last month, on Jan 7 and 21, raising 10 trillion rupiah (S$1.04 billion) and 15 trillion rupiah, respectively. Tomorrow, another bond sale will be held, which aims to raise another 10 trillion rupiah.

The Jan 21 sale was particularly good, as the original target was only 10 trillion rupiah. Indeed, the government could be on the right track to meet its target of raising 75 trillion rupiah from such exercises in the first quarter of 2014.

This news is welcome as Indonesia’s economy is entering a period of uncertainty this election year. The rupiah is not in good shape; it is currently one of the worst-performing currencies in Asia. Meanwhile, foreign reserves stayed below US$100 billion (S$126 billion) for a sixth month in November.

The current account deficit remains a serious problem, with Bank Indonesia raising its benchmark rate by 175 basis points since early June last year.

Indeed, other measures were also taken to revive the value of the rupiah. An earlier US-dollar-denominated bond sale for local investors was held in November last year, but failed to reach its target of US$450 million.

With the United States Federal Reserve’s quantitative easing (QE) programme being further reduced by another US$10 billion to US$65 billion monthly, conditions are expected to get worse.

STARTING ON THE RIGHT FOOT

While India, another member of the “Fragile Five” (along with Indonesia, Brazil, Turkey and South Africa), has observed a bounce in its currency over the past few months, the rupiah cannot seem to get a lift. To be fair though, the Indonesian economy has started this year on the right foot.

Bouncing back from its November failure, Indonesia earlier last month sold the largest US-dollar-denominated bond in Asia since 1998 — to the extent that the planned US$3 billion issue was increased to US$4 billion.

Two US$2 billion tranches of 10-year and 30-year bonds were sold — priced to yield 5.95 per cent and 6.85 per cent respectively.

The coupon rate was higher this time, compared with 5.68 per cent for existing notes due 2023 and 6.35 per cent for 2014 notes, according to price compilations by Bloomberg.

Perhaps the higher coupon rate was the winning formula in grabbing investor interest — with US$17.5 billion in bids submitted, four times more than the amount offered. These successful sales will no doubt boost the country’s foreign reserves.

More interesting, however, is the fact that a significant portion of demand came from the US — 66 per cent of the 10-year notes and 70 per cent of the 30-year notes were allocated to US investors, despite the concern over the possible end of QE.

Indonesian policymakers seem to have learnt the lessons of the November bond sale.

In addition, the International Monetary Fund (IMF) has upgraded global growth forecasts to 3.7 per cent in 2014 — which could potentially lead to rising emerging-market stocks and currencies.

This, along with the successful bond sales, may signal a return of investor confidence in Indonesia.

THE POLITICAL FACTOR

Of course, the more investment will create more confidence in the market, which in turn will attract further investment. Indonesia, therefore, has reason to be cautiously optimistic about the future. But only just so.

While the possible negative side-effects from the end of QE might have already been factored in, there is still ambiguity when it comes to the coming elections — especially regarding who will eventually end up on top and what their policies will be.

Hence, investors could remain risk-averse. This will obviously discourage investment in the economy. Therefore, despite the rupiah stabilisation (currently at 12,056 per USD), it remains to be seen where the currency will head in the months to come.

Hopefully, with the improving macroeconomic fundamentals, the Indonesian economy will regain its shape before the QE programme is effectively ended.

Again, this requires reform, but more importantly, the political will to see these reforms through.

Politics and economics are still going hand-in-hand this year.

ABOUT THE AUTHOR:

Karim Raslan is a columnist who divides his time between Indonesia and Malaysia.