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Funds turn bullish on Indonesia bonds

Kuala Lumpur

INDONESIA has at times felt uncomfortably close to the centre of this year's emerging market selloff as bond yields rose for five straight months and the rupiah slid more than 6 per cent. Some funds are now saying it's time to get back in.

Loomis Sayles & Co is looking to boost holdings of Indonesian bonds, citing sound domestic fundamentals and inflation that is close to target. Western Asset Management Co says a proactive central bank and the recent increase in yields may be creating a buying opportunity for the country's dollar-denominated debt.

"Indonesia's response to the wider emerging market turmoil has been ahead of the curve," said Desmond Soon, Singapore-based head of investment management for Asia ex-Japan at Western Asset, which oversees US$420 billion. "We should be buying as Indonesia's dollar bond yields rise when there is no material increase in default risk - rather than selling."

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The bullish sentiment about the bonds of South-east Asia's biggest economy highlights that areas of perceived value are emerging amid a slide in developing nation assets that started in January. Investors are focusing on the countries that will be less affected by US-China trade tensions and those in which policy makers are proving most adept at managing the impact.

Indonesia found itself relatively vulnerable to the selloff in emerging markets given that more than a third of its sovereign bonds are held by overseas investors. At the same time, the nation has a widening current account deficit and is exposed to swings in commodity prices.

Yields on Indonesia's 10-year bonds climbed for five straight months through June to reach a high of 7.90 per cent, up from 6.32 per cent at the end of 2017. Those on its dollar-denominated debt have climbed 81 basis points this year to 4.34 per cent. The rupiah slid to 14,565 per US dollar last month, a whisper away from a 17-year low set in 2015.

Some positives are now emerging. The government predicts economic growth will accelerate to 5.2 per cent this year, from 5.1 per cent in 2017, while inflation slowed to 3.18 per cent in July from as high as 4.37 per cent last year.

Loomis Sayles, which owns both Indonesia's local currency and dollar bonds, says the positive domestic outlook will support demand for Indonesian assets once risk sentiment improves.

"As long as global growth projections aren't impacted by the uncertainty that comes with the trade protectionism rhetoric of the past couple months, these are just better levels to buy Indonesian risk," said Lynda Schweitzer, a portfolio manager on the global bond team at Boston-based Loomis Sayles, which oversees US$264 billion. "For now though, weaker market sentiment towards risk suggests patience is the right strategy."

Indonesia's response to the selloff has also afforded investors a measure of comfort and helped burnish the appeal of its bonds. The central bank has announced a raft of measures, including a new overnight benchmark rate for banks and raised its benchmark interest rate three times starting in May to support the ailing rupiah.

A smaller supply of government bonds may also lend support to the rupiah debt market. The finance ministry plans to lower net issuance by 6 per cent to around 384 trillion rupiah (S$36.3 billion) this year, Loto Srinaita Ginting, director of budget financing and risk management, said on Wednesday.

Schroder Investment Management Ltd is also among the bulls, having a medium-term positive view on the nation's dollar-denominated bonds.

"We anticipate that eventually the broad-based dollar strength is likely to plateau in the coming weeks or months and this could result in an improved sentiment toward Indonesian dollar bonds," said Manu George, director of fixed income in Singapore at Schroder Investment, which oversees the equivalent of US$582 billion. "US growth is in its late cycle and the fact that it has a twin deficit, current account and fiscal, are likely to be headwinds for the dollar." BLOOMBERG