BII Weekly Bond Report - 31 Mar 15

Under Pressure with fuel Price Hike

BOND MARKET REVIEW

Indonesia bond market recorded gains amid minimum market sentiments last week. Investors were basically confused where the bond market is heading. Due to tight liquidity of Rupiah, local bank were seen selling their bond portfolio to the market while on the other hand, foreigners were seen on the buy side. Bank Indonesia governor in a statement to the press expects foreign ownership in Indonesia bond market to be below 30%. We confirm this with DMO and found that they were not in any discussion with the central bank in regards to restriction of foreign ownership in Indonesia bond market. Result of President Jokowi seven day trip to Japan and China may have impact in Indonesia economy in the long term but definitely have minimum impact towards bond market performance ahead. DMO last week issued PBS006 worth of Rp2.7 bn through private placement where Indonesia Deposit Insurance Corporation (LPS) was acting as the standby buyer. Overall, market across the region booked gains last week with Singapore bond market leading with an incline of 1.08% followed by Philippines (+0.61%), Indonesia (+0.37%), Thailand (+0.36%), Malaysia (+0.16%), South Korea (+0.14%) and Taiwan (+0.05%) while China (-0.53%) and India (-0.15%) continue booking losses.

Foreign ownership stood at Rp502.2 tn or 38.47% of total tradable government bond as of Mar 27^th. Foreigner booked net buy worth of Rp3.79 tn last week. On the other hand, ownership of investors which are segmented as others incline by Rp3.12 tn. This is caused by the PBS006 private placement to LPS.

Total trading volume at secondary market for the government segment was noted amounting Rp68.29 tn with average trading volume per day of Rp13.66 tn (vs average per day (Jan – Dec) trading volume of Rp12.70 tn) during last week with FR0070 (10y benchmark series) as the most actively traded with total volume reported amounting Rp14.56 tn. On the corporate segment, total trading volume was noted moderate amounting Rp2.84 tn resulting in average trading volume per day of Rp0.57 tn (vs average per day (Jan – Dec) trading volume of Rp0.75 tn) with BEXI02ACN5 (Shelf registration II Indonesia Eximbank Phase V Year 2015; A serial bond; Maturity date: 23 Mar 2016; Rating: _idAAA) as the most actively traded bond with total volume reported amounting Rp207 bn.

DOMESTIC MARKET UPDATE

Summary on the President’s trip to Japan and China. President Jokowi starts his state visit by visiting Japan and China. These countries along with U.S. market and Eurozone are considered as Indonesia’s major trading partners. The President continues to promote Indonesia to its major partner with a specific goal: Foreign Direct Investments (FDI). From trip to Japan, he was promised by Japan Prime Minister a loan worth of ¥140 bn for railway projects which includes current MRT project which is under construction and welcome’s more Japanese firms and their investment, especially in the fields of power generation, port construction, road improvement, expressway construction and building industrial complexes in special economic zones. From trip to China, both of the leaders did not discuss any specific/concrete commitments hence discussed various bilateral issues and witnessed the signing of several memorandums of understanding (MOU) on the issues of finance, industry, infrastructure, natural disaster management and aerospace. “Implementation” is what we should wait now. With more realization of Jokowi’s investment plan, we may see a positive sentiment in Indonesia economy thus would result in better rates prices. Hence, the positive sentiment won’t any where soon.

Weekly auction with an indicative target issuance of Rp10 tn. DMO will conduct their final conventional auction in first quarter this week with four series to be auctioned which are SPN03150701 (Coupon: discounted; Maturity: 1 Jul 2015), SPN12160401 (Coupon: discounted; Maturity: 1 Apr 2016), FR0070 (Coupon: 8.375%; Maturity: 15 Mar 2024) and FR0068 (Coupon: 8.375%; Maturity: 15 Mar 2034). We believe that the auction will be oversubscribe by 1.5x – 2.5x from its indicative target issuance while our view on the indicative yield are as follows SPN03150701 (range: 5.500% – 5.600%), SPN12160401 (range: 6.000% – 6.100%), FR0070 (range: 7.400% – 7.500%) and FR0068 (range: 7.680% – 7.780%). Till last week, Indonesian government has raised approx. Rp92.1 tn worth of debt through bond auction in 1Q 15 which represents 117.3% of the 1Q 2015 target of Rp78.5 tn. On total, Indonesia government has raised approx. Rp170.2 tn worth of debt through domestic and global issuance which represent 37.7% of this year target of Rp451.8 tn.

This week, we see Indonesia bond market would move with a negative tone as a result of inclining RON88 and diesel prices to Rp7,300 per liter and Rp6,900 per liter respectively which may create a cost push inflationary. Other reason for bond price to decline this week is Yellen’s statement on Friday where she sees that FFR hike may start from this year. Our house remains on the call of 50 – 75 bps hikes in FFR this year. Indonesia inflation data will be published this Wednesday with an inflation expectation of 0.20% mom or 6.38% yoy by economist consensus; further expectation of inflation (due to fuel price hike) may hamper positive sentiment this week. Investor might also wait and see on the U.S. NFP data and unemployment rate which will be published at the end of this week. NFP is expected to reach 250K while unemployment rate is expected to remain at 5.5%. Any NFP number above than 250K and between 250K – 300K would be negative for LCY bond market. We expect 10y yield may move within the range of 7.25% - 7.50% this week.