Tax reforms and the introduction of repos will underpin positive momentum in the rupiah bond market, sellside analysts consulted by Asset Benchmark Research in 2Q 2018 note. Ratings upgrades by the three major rating agencies as well as the inclusion of 50 rupiah bonds into a major bond market index buttressed both the primary and secondary bond markets in Indonesia.

"With the entry level of bond yields already low and the lower capital gain appreciation expectation for Indonesian government bonds, we expect corporate bonds will give better opportunity of returns in the fixed income asset class in the next 12 months," an Indonesian researcher interviewed by Asset Benchmark Research in April commented.

Yet, despite the sustainable growth story in Indonesia, sellside individuals expressed concern over the need to deepen the corporate bond market, highlighting tax incentives and the development of a repo market as viable means to encourage corporate bond issuance.

"There are several legacy tax regulations and tax treaties, which have led to non-standard tax rates for different IDR bond investors across different countries," says one analyst. "This is different from many other Asian bond markets, and somewhat reduced investor interest and thus market liquidity. More standardized tax rates in-line with regional markets would certainly create more interest."

Even more individuals see the need for a repo market to be developed. "(The regulator) should allow for reverse repo (markets) that use corporate bonds as an underlying asset, so corporate bonds could be more active and liquid," says one Indonesian salesperson.

Adds another analyst: "Bank Indonesia has released new regulation on the macro prudential intermediation ratio (Rasio Intermediasi Makroprudensial/RIM) and macro prudential liquidity buffer (GWM RIM). Under this regulation, the RIM is calculated by incorporating the securities component of the bank into financing and funding ratio. It is expected to encourage banking intermediation function to the real economy in accordance with capacity and economic growth targets while maintaining prudential principles," a researcher in Indonesia commented.

Photo: Adam Cohn / Flickr

Please see the other stories in this series that cover India, Indonesia and Singapore.