BII Weekly Bond Report - 28 Oct 14

Time to Underweight Portfolio’s

BOND MARKET REVIEW

Inauguration euphoria of President Jokowi has definitely fueled the incline of bond prices in Indonesia bond market last week. This euphoria was moving bond prices higher at least till Wednesday with foreigner continues to be seen on the buying side. On last final days of the week, bond prices were basically stagnant as market was waiting for President Jokowi’s cabinet structure. President Jokowi announced his cabinet structure only on Sunday following clearance and suggestions from PPATK and KPK. This shows that he wants his ministries to have a clean record and is not currently involved in any corruption cases. Overall this week, most of the bond market across Asia recorded gain with Indonesia bond market recorded the largest gain as the market surged by +1.95% followed by India (+0.39%), China (+0.32%), South Korea (+0.30%), Philippines (+0.26%), Thailand (+0.13%), Malaysia (+0.07%) and Singapore (+0.03%). Only Taiwan bond market booked losses by -0.20% last week.

Foreigners have continuously purchased Indonesia government bonds worth of Rp12.47 tn since Oct 14^th conventional bond auction till Oct 21^st. Foreign ownership stood at Rp453.29 tn or 37.37% of total outstanding government bond as of Oct 23^rd. Within the same period of time, retailers added Rp21.65 tn as a result of ORI011 issuance while banks bought Rp0.26 tn.

Total trading volume at secondary market for the government segment was noted amounting Rp56.27 tn with average trading volume per day of Rp11.25 tn (vs average per day (Jan – Sep) trading volume of Rp11.18 tn) during last week with FR0070 (10-yr benchmark series) as the most actively traded with total volume reported amounting Rp13.04 tn. Government bond with tenor 5 – 10 and 15 – 20 years dominated Government bond trading last week. On the credit segment, total trading volume remains thin amounting Rp2.67 tn resulting in average trading volume per day of Rp0.53 tn (vs average per day (Jan – Sep) trading volume of Rp0.64 tn) with BIIF01B (BII Finance I Year 2012; B serial bond; Maturity date: 7 Jun 2015; Rating: AA+_(idn)) was the most actively traded bond with total volume reported amounting Rp308 bn. Corporate bond with AAA and AA+ rating traded the most last week.

DOMESTIC MARKET UPDATE

President Jokowi announced Kabinet Kerja (Working Cabinet) structure with 13 ministers from political party and 19 professional minister. Post 6 days of President Jokowi’s inauguration and after acquiring clearance from PPATK and KPK, Indonesia president announce its cabinet structure under the name Kabinet Kerja on a Sunday. Kabinet Kerja consists of 13 ministers from political party while other 19 ministers are professionals. Bambang Brojonegoro, who was a former vice finance minister, was the chosen one to become the new Finance minister. According to us, market would favor him holding that title. Moving forward, this cabinet has conducted its kickoff meeting yesterday and might start discussing on subsidize fuel hike. We aren’t fully satisfied by the start up line yet we remain optimist on the changes which will be delivered by this cabinet. (Please see Appendix 1 for the details of Kabinet Kerja)

Opportunity for DMO to exceed 2014 issuance target; SILPA could be used for 2015 infrastructure spending. Indonesia government has raised approx. Rp421.1 tn worth of debt through domestic and global issuance which represent 97.88% of this year target of Rp430.2 tn. Assuming   that   if Indonesia government issues Rp1.5 tn upcoming final sukuk auction in 4Q 2014 then the Government needs to issue Rp4.14 tn at next upcoming two conventional auction in 4Q 2014 to meet their target of Rp24.79 tn. What’s next? DMO might have the opportunity to exceed their 2014 issuance target. This additional issuance will be categorized as SILPA and could be spend in the next fiscal year based on Indonesia parliament approval. DMO also should start their discussion for next year financing strategy.  In our opinion, DMO would continue sticking with their current 60% front loading strategy with 80% through domestic issuance and 20% through global issuance. There might be chances for DMO to issue various global bond instruments such as samurai bond next year as well.

Further this week, we see that bond price would move mixed with limited space for prices moving upwards. Several factor globally and domestically which would hinder upwards price movements are FOMC meeting results, 3Q 14 US GDP results and escalating discussion on subsidize fuel price hike. These three factors could either support bond market or might cause correction this week. A hawkish statement post FOMC meeting and better 3Q 14 US GDP data would affect negatively towards LCY bond prices. Market also now expects President Jokowi to announce a subsidize fuel price hike by Rp3.000,- post Kabinet Kerja kickoff meeting. The only positive sentiment this week was suppose to be euphoria coming from the finalization and inauguration of President Jokowi’s cabinet ministry yet it failed to pump in extra fuel to bring bond prices higher. We recommend our reader to start taking profit and start underweighting portfolios, anticipating a hike in subsidize fuel price. Overall, we see that LCY 10-yr bond yield would move within the range of 7.900% - 8.200% this week.