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Indonesia basks in good news but caveat emptor still applies
Despite the good news on the ratings front, owning offshore Indonesian debt carries a stern health warning, says contributing editor Jonathan Rogers.
Jonathan Rogers 13 Jun 2017

Things are going rather well for Indonesia at the moment, at least from a credit perspective. The sovereign recently enjoyed the benefits of an upgrade from Standard & Poor’s to investment grade, putting it in the rarefied company of sovereigns that have earned investment grade stripes from all three of the major Western ratings agencies.

That may seem a small detail, but in fact opens up a universe of investors to the sovereign – those only able to invest in credit that is rated investment grade by all three agencies.

They care about such things in Japan and South Korea, and this helps explain the 20bp-odd rally on the domestic Indonesian government curve which greeted the upgrade. The sovereign’s offshore curve pulled in too as the upgrade was released.

It’s not so long ago that the rupiah was being pummelled due to the country’s precarious fiscal position. But reforms enacted by president Widodo, including a tax amnesty and infrastructure spending programme, appear to have created a degree of macroeconomic stability that had been tellingly lacking in the country since the global financial crisis.

Perhaps there’s an irony in the fact that Indonesia managed to pre-fund its 2017 treasury needs last year, rounding off 2016 with a spectacular US$3.5 billion multi-tranche global. That meant that anything achieved in the international debt capital markets this year was more or less icing on the cake, designed to burnish the issuer’s reputation with global investors.

And that has been achieved with aplomb, via a well-executed sukuk and earlier this month with a ¥100 billion (US$896 million) Samurai that saw Indonesia break away from the guarantee support of Japan Bank for International Cooperation with its first public Samurai in over thirty years.

That might be enough to show that the stodgy Japanese investor base is becoming more adventurous from a credit perspective, or it might simply be a mechanical function of the S&P upgrade.

Nevertheless, I’m less than convinced that all this good news for sovereign Indonesia will trickle down in efficient fashion to the country’s corporate sector. The hope after the upgrade is that Indonesian corporate paper will find its way into the hands of foreign investors, where representation is light in relation to offshore holdings of Indonesian government paper.

There might well be something in this from the point of view of real rates in the rupiah market, where the 6% handle at 10 years on government paper is eye-catching in relation to the Asian regional government bond complex.

The macroeconomic stability cited by S&P in its ratings upgrade report means that owning the rupiah should be less anxiety-inducing than it has been in the recent past. A raft of quasi-sovereigns such Pertamina and Telkomsel were upgraded along with the sovereign by S&P, in theory opening the door for issuance.

Still, the country’s offshore dollar issuers have a lousy history when it comes to default and restructuring and one must question the will to repay at a large number of Indonesia’s corporates.

History has shown that when Indonesian issuers experience industry downturns – coal and shipping have been well represented in this respect – coupon payments fail to be made. For that reason, despite the good news on the ratings front, in my book, owning offshore Indonesian debt carries a stern health warning.

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