by Morgan Davis
In the two decades since the Asian financial crisis, Indonesia has made a comeback in the bond markets, proving to global investors that it’s a savvy sovereign issuer and home to some attractive corporate credits selling dollar notes.
Now, some issuers are apparently flirting with the idea of offshore rupiah bonds, mimicking similar offshore local currency markets like those of China and India.
The bonds, already dubbed ‘nasi goreng’ issues by Bloomberg after Indonesia’s tasty fried-rice dish, could tap new liquidity for issuers and feed into the country’s drive for domestic improvements.
Indonesian toll-road operator, Jasa Marga, may cook up the nation’s first nasi goreng bond. The company has said it is planning the sale of an offshore rupiah bond in 2017 if possible and has already met investors in a non-deal roadshow to gauge their interest.
While there is no official announcement about a proposed transaction, the company hopes to have more information for the public soon.
Any other potential nasi goreng issuance is only rumour right now. May Chan, head of debt capital markets for southeast Asia at Deutsche Bank, says she expects the first issuers to be sovereign-linked entities, if not the sovereign itself.
“The Indonesian government continues to focus its policies and efforts on building infrastructure to improve wealth distribution across the country,” says Chan.
Indonesian president Joko Widodo won his election in 2014 largely on his promises to find investors for the country’s sagging infrastructure. The state budget in 2016 allocated about $22.9 billion to infrastructure, the highest amount ever, and Widodo continues to push that number higher.
“Large corporates engaged in domestic infrastructure are likely to be at the forefront of the global IDR (Indonesian rupiah) market,” says Chan.
A representative for the ministry of finance says that the sovereign has no plans to issue rupiah notes offshore in the near future.
But Jamie Grant, head of Asia fixed income at First State Investments, thinks a serving of the notes from the country is likely.
“It’s clear to me that they’re looking and seeing what other Asian countries are doing,” he says. “It’s an inevitability.” He points to the development of the dim sum and masala bond markets.
|Jamie Grant, First State Investments|
Grant says he hasn’t heard of any issuers considering an offshore rupiah bond in the near future, but the concept makes sense because the opening of an offshore rupiah market would fit in well with Widodo’s ambitious plans to develop the country’s infrastructure.
Indonesian issuers are generally well received abroad, and infrastructure-related names could tap the dollar market, but they may be prohibited from getting the size and price point they want in dollars because of a lack of name recognition in the west.
Dollar-denominated bonds also put the currency risk on the issuer, while a rupiah-denominated bond shifts that risk to the investor.
“You have the willingness of the government to invest in infrastructure, so there is a need for funding,” says Grant, listing reasons why a nasi goreng market could easily bubble up: “You have a world still hungry for yield” plus there is the example set by India’s masala bonds, he adds.
For companies without dollar revenues, taking rupiah offshore provides access to more liquidity without having to deal with foreign exchange risks, points out Deutsche’s Chan.
“Full cross currency swaps are quite costly, but we have seen non-sovereign corporates who fund in the dollar market hedge themselves effectively and efficiently with cancellable call spreads within a certain USD/IDR band,” says Chan. “However this still entails a degree of risk that sovereign-linked entities have difficulty justifying.”
If Indonesian issuers decide to pursue the offshore rupiah route, they can at least take some tips from their Indian and Chinese counterparts, says First State’s Grant.
“If they want the market to develop, they really need a rating from S&P and Moody’s,” he says. “It’s really driven by the quality of the first few issuers.
“It’s a slow process that needs constant issuance,” Grant says. “One of the problems with these types of markets is the lack of liquidity.”
To develop the market, issuers need to feed it.
This year could prove perfect timing for Indonesia to push its currency offshore. While the country has been treated as an investment-grade entity by many in the market, it got official investment-grade status from S&P in May, upgrading its rating to be on a par with Moody’s and Fitch.
The upgrade, says Grant, “immediately had a positive impact on demand for anything Indonesian”.
Deutsche’s Chan says: “The timing is right given the relative recent resilience shown by the IDR and the country’s solid economic fundamentals. Global investors want access to the global settlement systems, international listings and ratings, as well as liquidity.”
Plus Indonesian corporates can offer enticing spreads.
“In a yield-hungry world, it does look attractive,” says Grant of hypothetical issuance. And the buyers would easily be Asian investors.
“If you look at the evolution of the investors in the dollar market…Asians are buying Asian issuers,” he says. “They understand the credits they’re investing in.”
Demand for offshore rupiah notes could also come from international development organizations, says Jan Dehn, head of research at investment managers Ashmore. Similarly, they could appeal to hedge funds, banks and other short-term buyers. Emerging-market investors also look for the high yields and more liquid bonds that are typically found in onshore markets.
“Still, if the price is right, there will be demand,” Dehn says, provided issuers are willing to pay a liquidity premium to attract investors.
Offshore local currency bonds play well in emerging market portfolios as a diversifier, says Kheng-Siang Ng, Asia-Pacific head of fixed income at State Street Global Advisors.
“Some of the (Indonesian) names that are already in the emerging market bond universe would be widely acceptable for the emerging market investors,” he says, if they decide to issue in offshore rupiah rather than dollars. And expatriate Indonesians may also find nasi goreng bonds attractive investment options. “There’s a lot of Indonesian money being parked in Singapore,” says Ng. “There could be some natural demand for them to buy the bonds.”
|Kheng-Siang Ng, State Street|
Strong credits, especially those with government links, will help stabilize the market when it starts. While Ng hasn’t heard of any issuers pursuing nasi goreng issuance yet, he doesn’t expect the sovereign to lead the charge.
“I don’t think this initiative is coming from the government,” Ng says, adding that the interest in offshore rupiah issuance seems to be coming from the private sector.
However, “if you have the government behind the initiative, it tends to be stronger,” says Ng. “You’ll get more publicity and more buy-in,” as was the case with both China and India.
“Most real money investors with an institutional client base would be much more inclined to go to the conventional onshore local currency
notes,” says Dehn. “For us, these types of securities have almost no value.”
However, the value in developing an offshore rupiah market is more long-term in nature, Dehn says. Emerging markets first issued dollar notes because they lacked a trustworthy market for foreign investors and were without an established local investor base. Now that this is developing, there will be more demand for local currencies.
China, for instance, has been pushing the renminbi as a viable investment, developing an offshore market for such bonds in London. Indonesia should follow suit, Dehn says.
“Nobody is really talking about this yet, but I think Indonesia is a future global reserve currency,” says Dehn.
He sees the decline of the euro and dollar as a sign that emerging market currencies have room to rise and become the new global reserve currencies. In which case, “it’s important for Indonesia to develop an offshore currency bond market.”
SSGA’s Ng says: “I’m not sure how much of bilateral trades have been done in rupiah, but that could be another area (for growth) where offshore rupiah could be tapped for these bonds.”
Ng points out that China is also a good example of a country pushing its own currency to be used for trade settlements, giving the offshore renminbi added value.
Neighbouring countries such as Singapore and Malaysia could be open to a similar arrangement with Indonesia if the authorities agree that some bilateral trades can be done and settled in rupiah, Ng reckons.
|Jan Dehn, Ashmore|
Still, China’s dim sum market and India’s masala market have both struggled to gain consistent traction with either investors or issuers, despite government support in both cases – though many point out that these markets are still young.
One important difference, however, is that Indonesia’s domestic market is not out of reach of foreign investors.
“Indonesia has no capital controls, unlike China, or quota, unlike India, restricting foreigners from buying onshore IDR bonds,” says Desmond Soon, head of investment management for Asia (ex-Japan) at Western Asset Management. “It is an established market since the Asian financial crisis.”
Indonesian corporates are quite active in offshore dollars, Soon says, so investors would have less reason to go to the offshore rupiah bond.
“We don’t see this market becoming a very large or important market for Indonesia,” says Ashmore’s Dehn, but “as the world economy grows and more companies and countries issue bonds, then we should expect these types of securities to become more prevalent.”
At the same time, domestic markets will grow, and the offshore local currency markets will be seen as niche investments.
Just give it time, says the optimistic Grant: “Issuance has grown significantly in the dollar credit market since 2008. It just takes time, assuming the mechanisms are in place to support liquidity.”