Tuesday, November 18, 2014

BII Weekly Bond Report - 18 Nov 14


Limited Pressure from Fuel Price hike

BOND MARKET REVIEW


Indonesia bond market recorded a slight gain last week supported by inflows to the bond market as 3Q 14 Current Account data despite came in deficit but was much more better than economist consensus. Oil prices which continue to be below US$80 per barrel have triggered Indonesia government to increase subsidized fuel price by Rp2,000 which is lower than their initial plan of Rp3,000. This generates a smaller inflation impact thus Indonesia central bank may leave their reference rate at 7.50%. These market sentiments have made bond prices to escalate last week. Bond market across Asia remains moving in a positive tendency last week with Thailand bond market recording the largest gain as the market surged by +0.52% followed by Indonesia (+0.25%), China (+0.22%), Philippines (+0.21%), Taiwan (+0.20%), Singapore (+0.08%), India (+0.06%) and Malaysia (+0.00%). On the other hand, only South Korea bond market booked losses of -0.47% last week.

There are no new publications of foreign ownership data by DMO. Foreign ownership as of Nov 6th stood at Rp462.33 tn or 37.79% of total outstanding government bond. Indonesia 5-yr CDS narrows to 141.500 bps at the end of last week trading from 145.310 bps in previous week or narrowed by 3.81 bps.

Total trading volume at secondary market for the government segment was noted amounting Rp57.23 tn with average trading volume per day of Rp11.45 tn (vs average per day (Jan – Oct) trading volume of Rp11.24 tn) during last week with ORI011 (3-yr) as the most actively traded with total volume reported amounting Rp16.66 tn. Heavy trading of ORI011 occurred as the asset past its 1 month holding period and is eligible to be traded at the secondary market. Government bond with tenor 1 - 5 years dominated Government bond trading last week. On the credit segment, total trading volume was noted moderate amounting Rp2.55 tn resulting in average trading volume per day of Rp0.51 tn (vs average per day (Jan – Oct) trading volume of Rp0.65 tn) with ASDF02ACN4 (Shelf registration II Astra Sedaya Finance Phase IV Year 2014; A serial bond; Maturity date: 9 Nov 2015; Rating: AAA(idn)) was the most actively traded bond with total volume reported amounting Rp355 bn. Corporate bond with AAA rating traded the most last week.

DOMESTIC MARKET UPDATE


Central Bank kept its reference rate unchanged at 7.50%. With Indonesia October inflation rate remains manageable while trade balance and current account seen narrowing compared to last year, there are no reason for why the central bank should increase their reference rate at current point. We see that recent subsidize price hike by Rp2,000 per liter would keep BI rate firm at 7.50% as additional inflation generate by the subsidize price hike would be around 2.5%. As we know, Indonesia government increased Premium subsidized fuel to Rp8,500 per liter from Rp6,500 per liter and subsidized Diesel price to Rp7,500 per liter from Rp5,500 per liter. BI Rate at current condition could accommodate and maintain a stabilized macroeconomic and financial system condition. With all fundamental data looking stable and moving as expected amid within a moderate pace, Fitch affirms Indonesia sovereign credit rating at BBB- with stable outlook which is considered an investment grade. A chance of Indonesia sovereign credit rating to move in a positive direction seems opened now, having in mind that Indonesia government would divert the spending of subsidize fuel to investment spending.

YTD current account continues to narrows with a moderate pace. Post Indonesia central bank tightening its monetary policy last year, Balance of Payment (BoP) started to move in a direction expected by the policymaker with 3Q 14 BoP came in with a surplus of US$6,475 mn. Hence the surplus of BoP is supported by a large surplus of financial accounts specifically huge surplus in Portfolio Investment. Current account on the other hand remains deficit (3Q 14 CA: -US$6,836 mn) despite narrowing with a moderate pace. However, the main issue of Indonesia current account remains the same: oil balance deficit (consumption remains large) and thin non oil and gas surplus (current commodity prices continue to slump as global demand remains sluggish). In such situation, recent subsidize price hike combined with several regulation might help to lower fuel consumption resulting in a narrowing oil balance deficit which would make Indonesia fundamental to look even better and stronger.

We see that bond market would be rangy this week with FR0070 (10-yr benchmark series) yield to move within range of 7.800% - 8.100%. With all domestic fundamental data issued, Indonesia bonds price volatility this week would be more affected by domestic political condition, market sentiments and future expectation, global sentiments and foreign inflows or outflows. Domestic political condition: Improving relation between Merah Putih Coalition and Indonesia Hebat Coalition would have positive effect on bond prices volatility this week as investor might appreciate both Indonesia government and legislative working together to reach a goal set by President Jokowi. Market sentiment and future expectation: With recent subsidize fuel price hike, there would be a negative implication on bond prices which might hinder bond price appreciation as subsidize price hike would generate a one-off inflation. With higher inflation expectation, investor might wait till bond prices slumps to get a better yield (average yield spread 10-yr – headline inflation: 1.894% between Jan 10 – Nov 14). Yet after couple of months specifically in the month of January - February, we see bond investor should start OverWeight their portfolio with a consideration on easing headline inflation due to harvesting season and foreign inflows might occur since beginning of February 2015. Volatility of bond prices this week might also be influence by global data release specifically US data release such as industrial production data, PPI, FOMC minutes release and US October inflation. Finally, an aggressive inflow by foreign investor into Indonesia bond market would certainly help bond prices to move higher. These inflows may occur anytime for various reasons.

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