FW: CIMB Tactical View - 02 Apr 2018 - The index inclusion game: Indonesia?s & China?s bonds

 

 

 

HIGHLIGHTS

• We remain positive on Indonesian government bonds and expect the 10y IndoGB to approach 6.30% by 4Q18 (another >35bps compression), in line with our forecast which has been vindicated since the Fixed Income Navigator publication on 16-Mar-2018. Much of the negatives on US rate hikes and tariffs were priced through to the 6.90% peak on 23-Mar-2018. The resultant flows into the bond market will likely drive USDIDR lower towards our target of 13,500 towards the middle of the year. The attractive valuation coupled with Trump-induced Dollar weakness may drive the pair lower and keep it supported till the end of the year.
• Sentiment in the IDR government bond market received a boost when in Dec-2017 Fitch upgraded Indonesia. Further, in February 2018 Indonesia received another boost when Bloomberg announced inclusion of IDR–denominated debt into the Bloomberg Barclay's Global Aggregate Index.
• We are confident on Indonesia's fiscal position – target IDR325.9t budget deficit (IDR397.2t target 2017) or 2.49% of GDP in 2018 (2.57% of GDP in 2017). We base this on continued strong macro conditions (CIMB economist forecasts 5.3% GDP growth in 2018) which will support government's revenue and collection.
• There have been some recent developments which has raised some perceived risk on the fiscal outlook ‑ the government plans to maintain fuel and electricity tariffs unchanged until end-2019, and to raise solar diesel subsidy from IDR500 per litre to IDR700-1,000 per litre. Our economist signaled that Pertamina is likely to absorb the fuel subsidy costs; leaving expected government budget still below the 3.0% self-imposed limit. We are not overly worried.
• Net financing need of the Indonesian government at IDR414.5t for 2018 is smaller versus 2017's IDR442.5t issuances. The lighter funding target amid improvements in the fiscal situation and macroeconomic growth with benign inflation, and improving sovereign credit, are supporting demand in the government bond market.
• Bloomberg has recently announced that RMB-denominated government and policy bank securities will be added to its Bloomberg-Barclays Global Aggregate Index. Impact of China's entry is not expected to be disruptive to regional bond markets: 1) at 5% of the index for China, rest of the other members should see reduction of just 5% of each, and 2) timing for China's bonds to be included is relatively long, phased over a 20-month period starting in April 2019 with a 'scaling factor' of 5% and in 5% increments each month.

CIMB Treasury & Markets Research-Fixed Income
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