Indonesia sells US$3.5b of dollar bonds to preempt Fed

DEC 2, 20157:32 AM

[HONG KONG] Indonesia priced its second sovereign dollar bond sale of 2015 on Tuesday to preempt a likely increase in US borrowing costs.

The government issued US$2.25 billion of 10-year notes and US$1.25 billion of 30-year bonds; the 10-year debt yields 4.8 per cent while the 30-year bonds pay a six per cent yield. That's higher than the secondary market where dollar securities due January 2025 yielded 4.59 per cent as of 12.29pm in Jakarta and those due January 2045 yielded 5.72 per cent, data compiled by Bloomberg show.

"There seems to be a decent new-issue spread premium," said Tim Condon, head of Asia research at ING Groep NV in Singapore, said before the final pricing was set. Indonesia could do another offer early next year if market conditions are favourable, he said.

Indonesian authorities said last month they were planning a second dollar sale in 2015 to start raising money for next year's budget, and futures contracts show a 74 per cent chance the Federal Reserve will hike interest rates this month.

The government will increase the proportion of foreign-currency debt to 30 per cent of total issuance in 2016 from 24 per cent this year to guard against potential increases in local-currency yields as the US raises rates, Robert Pakpahan, director- general at the budget financing office in Jakarta, said Nov. 12.

BUILDING RESERVES

Indonesia last sold dollar bonds in January, issuing US$4 billion of 10- and 30-year notes at coupons of 4.125 per cent and 5.125 per cent, respectively.

Proceeds from this week's sale will bolster the central bank's foreign-exchange reserves, which have fallen 10 per cent to US$100.7 billion this year through October.

"The country wants to pre-fund ahead of a potential Fed liftoff," said Avanti Save, a credit strategist at Barclays Plc in Singapore.

"Compared to global emerging-market peers, Indonesia has stronger credit metrics and credit ratings are expected to remain stable."

Standard & Poor's said on Tuesday it would retain its rating of BB+, the highest junk level, for Indonesia after the nation increased its global medium-term note programme by US$10 billion to US$40 billion.

The rating has a positive outlook, indicating the possibility of an upgrade over the next 12 months if the government achieves more reforms such as allowing fuel prices to adjust more freely, S&P said in a statement. Moody's Investors Service and Fitch Ratings assess Indonesia at the lowest investment grade.

"Given their borrowings are relatively light already, we think that even if they go to the limit of this programme it's not going to really affect their credit rating," said Kyran Curry, S&P's director of sovereign ratings in Singapore.

Indonesia's dollar bonds have lost 1.1 per cent this year, compared with a 0.4 per cent drop for Malaysia and 3.3 per cent gain for the Philippines, according to JPMorgan Chase & Co indexes.

BLOOMBERG