(March 26): Indonesia’s local credit market is coming under strain as the Iran war drives oil prices higher, stoking inflation risks, accelerating capital outflows and sharpening concern over the country’s creditworthiness.
Local-currency borrowing costs for top-rated issuers have climbed nearly 70 basis points this month to the highest in almost a year, as investors price in the risk that energy will feed into inflation and complicate the policy outlook. Heightened scrutiny of Indonesia’s sovereign rating is already pushing up risk premiums across the domestic debt market.
Since he took office last year, President Prabowo Subianto has been proposing policies like a free-meals programme that raise concern about the statutory budget deficit cap, leading credit-rating companies to downgrade the country’s outlook. The country subsidises fuel costs, making its fiscal situation vulnerable to higher oil prices. And the central bank last week held rates steady as those factors pressure the rupiah.
“Yields are likely to remain elevated as long as oil prices stay above US$80 ($102.61) a barrel, as markets continue to price in higher inflation expectations,” said Albert Budiman, chief investment officer at UOB Asset Management Indonesia in Jakarta. “Corporate bond issuance could slow in the coming months, particularly if uncertainty around oil prices persists.”
The higher credit costs are beginning to weigh on primary activity after a strong start to the year. Corporate bond issuance has fallen 52% this month through March 20 from a comparable period in February, though volumes are still up 33% year to date versus a year earlier, indicating issuers had locked in funding before conditions deteriorated.
See also: Thailand’s largest mall operator plans US$3.4 bil expansion
“Some companies are front-loading fundraising to refinance upcoming maturities at lower interest rates,” said Harry Su, managing director of research at PT Samuel Sekuritas Indonesia. “An escalation of the Middle East conflict could drive up energy prices and borrowing costs, potentially slowing the recent surge in bond issuance.”
Refinancing needs are adding to the urgency. More than 374 trillion rupiah (US$22 billion or $28 billion) of local-currency bonds are set to mature this year, lower than the 458 trillion rupiah due last year but 30% above the annual average since the pandemic, prompting companies to tap markets early even as volatility rises.
Options outside the domestic market are also narrowing. With the rupiah near record lows and concerns over the sovereign rating intensifying, offshore bond markets and external loans have become increasingly difficult to access — even for higher-rated borrowers — leaving issuers more exposed to tightening conditions at home.
See also: The Garuda economy
“We are positioning defensively by shortening duration and being selective, focusing on higher-rated corporate bonds,” UOB’s Budiman said. “Risks in the distressed segment could increase if domestic consumption weakens further.”
Uploaded by Chng Shear Lane
