Is Indonesia trying to plug the currency hole with debt?
* Potential sukuk surprises investors
* Sovereign looking at high yields for new bonds
* Dollar inflow may stem currency depreciation
By Christopher Langner and Neha D'Silva
SINGAPORE, Aug 21 (IFR) - The Republic of Indonesia's announcement that it is meeting investors from Friday ahead of a new potential dollar transaction less than two months after its most recent deal shows the difficult straits the country finds itself in.
While the new issue will be a sukuk as opposed to the conventional offering it made in July, the market was still taken by surprise, with bankers away from the transaction questioning the timing, given the country's economic troubles.
With a growing current account deficit reported last week at 3.2% of GDP, the rupiah down about 10% this year, testing multi-year lows, and yields on the sovereign's 10-year bonds at almost 6%, their highest since 2009, the prospect of Indonesia issuing a dollar deal seems counterintuitive. There is a chance the sovereign may simply engage investors and wait for conditions to improve before executing the trade.
Yet, perversely, Indonesia might be better off issuing the bond sooner rather than later to stall the depreciation of the rupiah.
"The currency is flirting with Rp11,000/USD, so they have to do something," said one portfolio manager for a macro fund, which invests in currencies, equities and bonds.
FX RESERVES BOOST
Any issuance would mean the immediate injection of hard currency into Indonesia's coffers. That alone could potentially reverse some of the bearish bets on the rupiah.
Indeed, Indonesia raised questions if it was using expensive debt to stem a run on the currency with its July trade. Then, the rupiah was already suffering as investors withdrew money from the country in the wake of higher Treasury rates that resulted from the first clear hints by Fed Chairman Ben Bernanke that he could start to cut the central bank's asset purchase programme.
The sovereign issued a USD1bn 10-year bond that paid a coupon of 5.375% and priced at 99.391 for a yield of 5.45%.
That deal showed how quickly Indonesia's fortunes had turned in the capital markets, as it came 200bp wider than the 3.375% coupon it had paid on a USD1.5bn 10-year bond in April, which was its lowest print of all time on a conventional bond at that tenor.
Indonesia also offered a premium of 50bp over the outstanding paper on its July transaction to tempt buyers. For a borrower that had become renowned for squeezing the yield and spread as tight as possible, that was some concession.
But it needed the funds. The sovereign was already using its hard currency reserves aggressively to stem the rupiah's depreciation. So bringing in more dollars, even if through the issuance of more debt, may have been a good thing.
The money may also have been the country's way of replenishing its reserves, depleted by mass withdrawals by foreign investors.
Last week, Indonesia reported the level of hard currency it held in its reserves dropped to USD92.67bn by the end of July from USD98.1bn the month before, the lowest since October 2010. Had that USD1bn raised with the bond been absent, the USD91bn-odd that would have been reported would have been dangerously close to the psychologically important USD90bn mark.
Hence, investors have been speculating that Indonesia may be pushing its dollar sukuk bond to refill its coffers again.
"You manage your reserves around the reporting period by issuing dollar bonds," said the Singapore portfolio manager. "If you want to address a currency problem, I don't think issuing dollar debt is the way to do it."
If the sovereign chooses to issue another 10-year sukuk as it did last November, and it pays a 50bp premium as it did on its last dollar deal in July, Indonesia will be looking at a yield of some 7.1% on its new Islamic debt, given that the 2022s are trading at 6.6%. That deal originally priced at 3.3%.
"The positive thing about them doing a deal now is that it will send a soothing message to investors saying 'we have access to the capital markets'," said the portfolio manager.
"But it is a short-term fix that does not address the long-term issues and it will move all the spreads on Indonesian credits wider." (Reporting By Christopher Langner and Neha D'Silval; editing by Sudip Roy)
- U.S.'s Kerry expresses regret to India over diplomat case |
- Mega Millions winners in Georgia, California to split $648 million |
- China confirms near miss with U.S. ship in South China Sea
- Washington, DC city council raises minimum wage to $11.50/hr in 2016
- Fed cuts bond buying in first step away from historic stimulus |