Indonesian companies are some of the most established issuers in the offshore bond market. But the companies that borrow dollar funds are few in number, and largely state-linked. Likewise, the country’s domestic market is limited, with a few repeat issuers dominating the debt offerings. As a result, Indonesia has one of the smallest bond markets in Asia, but one with great potential.
Indonesia hasn’t always been a sleeping debt giant. During the 1990s, Indonesia led Asia’s tiny offshore bond market with its high-yield offerings. However, when the market exploded with the Asian financial crisis, investors were left reeling. Since then, the island nation, led by what has become a savvy and predictable sovereign issuer, has been clawing its way back into investors’ good graces.
Today, Indonesia’s corporate bond market is one of the smallest markets in the region. As of December 2018, the country’s corporate bond market reached Rp441 trillion, or about 3% of its GDP. In comparison, the Philippines’ corporate bond market makes up about 8% of its GDP, Thailand’s 21% and Malaysia’s 46%.
While these numbers do not include the private placement market, it is understood that Indonesia’s private market is smaller than its publicly offered bonds.
Still, budding opportunities are certainly there, especially as Indonesia has a number of established companies that are yet to court investors. Even domestically, the borrowing is largely limited to state-owned enterprises (SOEs) and financial institutions, with a limited number of debt issuers. In 2018 there were just 54 new bond and sukuk issuers in the market. As of June 2019, there were only 33, according to KSEI data.
“We see huge potential in the market,” says Boniarga Mangiring, investment specialist for CGIF. “Compared to other countries... we haven’t seen a lot of new issuers,” he says. “The market would love to see new issuers coming in 2020. They’re seeing the same issuers again.”
While new borrowers are limited, Indonesia’s onshore market is crowded, given the amount of money available. Issuers should be incentivized to look for offshore funds, which can generally be found at prices that are attractive to borrowers depending on the market conditions, says Boniarga.
Hurdles to issuance
Debuting in the offshore market, regardless of currency, is an unfortunate Catch-22 for many companies.
There are plenty of enticing reasons to seek offshore funding, including the diversification options and ability to raise large amounts of money, but there is also the inevitable difficulty of becoming a new issuer ‒ something that can plague a company from any country ‒ as well as the cost of funding and the recent market volatility.
The volatility, triggered by geopolitical problems, has been one of the biggest deterrents, and Joseph Jin Yong Park, acting head of guarantee operations for CGIF, reckons that as the market improves, more issuers will seek funding, boosting the market further.
Instability in the market has killed off any ambitions of taking rupiah offshore as well. The so-called Komodo bond market ‒ notes sold offshore but denominated in rupiah ‒ never took off. While a handful of companies marketed such notes, the shaky situation in Asian high yield and local currencies in 2018 slowed issuance to a standstill. Even Indonesia’s domestic market was dented in 2018, as companies were challenged by the fluctuating rupiah and increased interest rates.
As investors continued to be bombarded with geopolitical news and currency swings into 2019, the Komodo market was silent, and even Indonesia’s dollar borrowings seemed more tepid than usual. But many are hopeful that the market will roar back to life when conditions improve. “There is potential,” says Boniarga.
For the time being, the Indonesian market faces the additional hurdle of having bond tenors that are usually shorter than those of peer countries. Some 78% of Indonesia’s bonds in 2018 were issued with maturities of five years or less. Only 3% of corporate bonds were issued with longer than 10-year maturities. “Making the tenor of the corporate bonds in Indonesia longer would be a good thing,” says Dong Woo Rhee, chief financial officer at CGIF. In today’s low-rate environment in particular, investors are attracted by longer tenors on high-yield paper.
Finding unconventional options
There is a clear future for Indonesia’s bond market, but there may also be opportunities in slightly less traditional parts of the market. At the moment, Indonesia’s corporate bond market is largely made up of plain vanilla structures that include straight and fixed coupon bonds. But many agree that there is a future for Indonesia in securitization, for instance, or sukuk, the Islamic bonds.
The Islamic financing option has been hugely popular in nearby Malaysia. For a country with an overwhelming Muslim population, it makes a lot of sense for Indonesia to be a strong player in sukuk. But as it stands, sukuk makes up only about approximately 6% of total bond outstanding in July 2019, said Boniarga. He surmises that if Indonesia embraced sukuk it would provide a significant boost to the country’s bond market.
“The Indonesian market is now seeing an interesting number of Shariah-compliant investors,” says Boniarga. These buy-side participants, including mutual funds, are looking for Islamic financing options for their clients. The pool of such options is small, but Indonesia could be a significant contributor.
“Sukuk in Indonesia will be a good opportunity for investors as well to diversify their investment products,” Boniarga adds. As it stands, sukuk products, which conventional investors can also purchase, come from only a handful of places. As a bonus for issuers, the sukuk investor base, which tends to be buy-and-hold, provides more diversity and funding options for the borrowers too, he says.
With some 93% of corporate bonds held by local investors in 2018, Indonesia can go nowhere but up when it comes to its debt market. Foreign investors are chomping at the bit to have a piece of the emerging market, should the right products make themselves more available. The ingredients are in place, now Indonesia’s companies must complete the perfect recipe.