EXCLUSIVE - Indonesia head of debt dismisses S&P rating move

Fri May 3, 2013 5:28am EDT

* Official says markets remain confident in the sovereign

* Continued support should allow for additional issuance

* Indonesia plans first global debt swap this year

By Neha D'Silva

May 3 (IFR) - Indonesia's director-general of debt management Robert Pakpahan is not worried that rating agency Standard & Poor's has moved the country one step further away from investment grade by changing its outlook on the republic's BB+ rating to stable from positive on Thursday.

With Indonesia still enjoying investment-grade status from Moody's and Fitch, Pakpahan said he would continue with a busy schedule of international bond issuance, including liability management exercises and a maybe even a dollar bond issued onshore.

"S&P just revised the outlook. I checked the implications on the bond market after it closed. There was no negative impact at all," Pakpahan said in an exclusive interview with IFR during the Asian Development Bank meetings in India.

S&P's move came on the same day the rating agency gave the second investment-grade rating to the Republic of the Philippines. Indonesia achieved the coveted two investment-grade ratings before its neighbour. Fitch awarded it a BBB- in December 2011 and Moody's gave it a Baa3 rating in January last year.

However, the Philippines sovereign bonds have traded tight to Indonesia's for a while now and the differential between them widened on Thursday as bonds from the Philippines rallied, while those from Indonesia stalled.

The Philippines bonds due 2037 gained US$1.5 in price terms after the sovereign was upgraded to BBB- on Thursday afternoon Asian time and were last quoted at 122.25/122.75. Meanwhile, one trader said that Indonesia's recently issued bonds due 2043 were up by about US$1 on Thursday but ended the day only 50ct higher in price terms as some investors sold after S&P's outlook change.

The recently issued 2043s of Indonesia were unchanged on Friday at 103.85/104.85, having been sold initially on April 8 at a price of 98.012, while the Philippines 2037s were still on the rise.

Indonesia's 30-year bonds are still up almost US$6 since printing, which Pakpahan said showed that investors still viewed Indonesia favourably.

"It gives us confidence that global investors still believe in us and see that the Indonesian economy has been consistently growing, around 6%, and, in general, that fiscal policy and monetary policy sustainability is there. Investors are willing to even buy our 30-year bonds so that encourages us to maintain our policy so that investors' confidence will be rewarded," Pakpahan said.

That kind of confidence will have to be nurtured, as Indonesia still needs plenty of support from foreign investors. Pakpahan said the sovereign was forecast to end the year with a Rs153trn (US$15.7bn) deficit, which would have to be funded mostly through debt. "Because there are some securities that need to be refinanced, we need to issue in gross terms around Rs280trn," he said.

To be sure, not all of that will come from international markets. "For 85% of that (amount) we will rely on domestic issuance and for 15% we will rely on global bond issuance, both in conventional global bonds in dollars and global sukuks in US dollars," Pakpahan said. That means that the sovereign will fund some US$4.5bn internationally this year.

Two-thirds of that was raised in a two-tranche bond on April 7. The sovereign sold a US$1.5bn 10-year bond at a price of 98.953 and a yield of 3.5%, on a 3.375% coupon. A US$1.5bn 30-year tranche was priced at 98.012 with a 4.75% yield on a 4.625% coupon.

INNOVATION

Earlier this year, Indonesian debt management officials said they planned to issue US$1bn in dollar-denominated Sukuks in 2013. "In the second semester we plan to issue the global sukuk," Pakpahan confirmed.

Pakpahan also said that Indonesia might follow the Philippines' lead and issue dollar-denominated bonds onshore to local investors. The Philippines did a US$500m deal like this in November last year.

"One of the new things is we will issue onshore US dollar-denominated bonds for domestic investors...which we are planning in the second semester," Pakpahan said. "The purpose is to provide instruments for domestic investors who have savings or outstanding stock of US dollars so they can channel it to our sovereign bonds," he said.

"Tenor depends on the appetite. We haven't finalised it yet. It could be five or 10 years or even more than 10 years." For all his confidence, Pakpahan did acknowledge some of S&P's concerns. "I understand their reasons, especially regarding the fuel subsidy," he said.

In its release on the rating, S&P said: "The political considerations related to next year's parliamentary and presidential elections appear to increasingly shape policy formulation ()As an illustration, the government has been reluctant to deal decisively with the fuel subsidy problem, even as structural shifts in the domestic oil market have increased the vulnerability to fiscal and balance-of-payment outcomes."

Moreover, Pakpahan seems to have taken to heart the lesson that the Philippines' upgrade offered. The sovereign managed to jump from BB- to BBB- by S&P in eight years partly due to an aggressive liability management program. Pakpahan said the time had now also come for Indonesia to start cancelling high coupon bonds and replacing them with cheaper ones.

"Liability management is one programme that we started to exercise and we are planning to execute it sometime this year," Pakpahan said. "The methodology and the precise mechanism and implementation is not final yet, but we are in the process of finalising all the procedures and capacity-building and know-how to do the liability management."

He said that the sovereign had already started debt-switch programmes locally to lengthen the average maturity of its debt. "We have been doing a debt switch for domestic bonds, but this is the first time (we will do it) for global bonds," he said. (Reporting By Neha D'Silva; Editing by Christopher Langner and Nachum Kaplan)

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