Consequently, as of Feb 10, the JCI sank around 10% from Jan 26, reflecting the impact of MSCI’s free-float concerns and Moody’s negative outlook.
Financing remains on track
The Indonesian fixed income market has been reacting to fiscal headlines since the start of the year. Both the USD INDON curve and the local currency IndoGB curve have steepened year to date, in line with our curve bias. Given the market perception of fiscal uncertainty, we maintain our preference for short-end bonds. Investors may want to stay cautious against duration. We maintain our neutral credit direction for INDON for now, but we will closely monitor onshore developments and review this outlook in due course.
Regarding financing activities, year to date as of Feb 3, gross issuances via local currency and FX bonds amounted to IDR234 trillion ($17.6 billion) (including pre-funding). Domestic bonds and loans are expected to support 70%–75% of total fiscal financing needs.
Domestic auctions so far this year have all been upsized, likely to provide a buffer for financing needs. Most of the domestic supply has been absorbed by domestic investors, with banks and non-bank domestic investors increasing their holdings year to date, while foreign holdings were little changed from the start of the year. Although it is still early in the year, financing activities are on track with full-year financing needs, provided there is no material fiscal slippage.
See also: Mapletree Industrial Trust receives “AA-” credit rating with stable outlook from JCR and R&I
Sentiment-driven pressure
The Moody’s outlook downgrade and MSCI’s earlier announcement of a potential reclassification of Indonesia from “emerging market” to “frontier market” status added to the perceived caution around IDR, rather than introducing fundamentally new risks. Lingering downside risks remain around potential portfolio outflows, particularly as global investors reassess emerging market allocations in response to index- and rating-related signals. At the same time, ongoing concerns over fiscal slippage, alongside the prospect of further narrowing in yield differentials, may dim IDR’s traditional carry appeal, tempering the extent of any sustained appreciation and warranting a more cautious near-term trajectory.
That said, we see scope for IDR stabilisation over time. Many of the issues flagged by rating agencies and index providers have been well telegraphed and are somewhat priced in. A clearer demonstration of fiscal discipline, coupled with continued policy commitment to rupiah stability, should help rebuild investor confidence. The external backdrop also matters. IDR can trade with a neutral-to-stable bias when USD softness returns and global risk sentiment finds a better footing.
Credit impact remains manageable
Based on our findings, the price of sovereign bonds (ticker INDON) as of Feb 6 remained largely stable, ranging from +0.3 percentage points to –1.4 percentage points compared with Jan 26 (before the MSCI and Moody’s incidents). The long tenor bonds are generally the worst performers due to duration effects, with the worst performer (INDON 3.35 03/12/2071) falling 1.4 percentage points. The credit spread of these bonds mostly widened by 5–10 basis points based on our observations.
Overall impact on Indonesian corporate bonds under our coverage is manageable, in our view, with prices falling by up to 0.9 percentage points since Jan 26. Moody’s is expected to downgrade the outlook on state-owned enterprises (SOEs), including PT Perusahaan Listrik Negara and Pertamina Persero PT, to negative, in line with the sovereign rating action based on their respective downgrade triggers. Meanwhile, depending on how these incidents develop, there could be a wider impact on Indonesian corporate names if investor sentiment weakens further. At this juncture, we maintain a neutral view on Indonesian corporate bonds under our coverage. That said, we expect higher volatility in these Indonesian US$ credits amid negative headlines and weaker investor sentiment.
Chin Meng Tee, Andrew Wong, Frances Cheung and Christopher Wong are credit analysts with OCBC.
