Indonesian bonds outperform rivals, likely to rally more

Singapore

INDONESIA'S bonds have blown away their competitors this year and there are plenty of reasons to suggest they have room to keep rising.

The nation's sovereign debt has returned 13 per cent in 2019, outpacing the 6.1 per cent gain of emerging-market government bonds as a whole, according to Bloomberg Barclays indexes. Indonesia's securities have been boosted by central bank easing and an improving fiscal story, and gained despite the US-China trade war. Here are four reasons why the rally may still have legs:

Bank Indonesia has already cut its benchmark rate three times this year but economists predict there is more to come. The central bank will lower its seven-day repurchase rate to 5 per cent when it meets Thursday from the current 5.25 per cent, according to 11 of 15 respondents to a Bloomberg survey on Friday.

The one-month Jakarta interbank offered rate is hovering just 25 basis points above the policy rate, compared with a spread of 30 basis points the day before the previous rate cut on Sept 19. Bank Indonesia has room to lower rates again as long as it's able to maintain its inflation target, deputy governor Dody Budi Waluyo said last week.

While President Joko Widodo has pledged to boost government spending to a record to bolster economic growth, he projected in August that the fiscal deficit would decline to 1.76 per cent of gross domestic product next year, well below the self-mandated ceiling of 3 per cent. The International Monetary Fund predicted the deficit would remain stable at 1.8 per cent in its annual review of the Indonesian economy released in July.

While Indonesian bonds escaped the worst of the emerging-market sell-off from escalating US-China trade tensions, there's some prospect they will benefit from any lessening in tensions. Indonesia's 10-year yields have dropped 15 basis points this month as the US and China pledged to keep working towards a comprehensive trade deal following a round of talks in Washington that ended Oct 13.

One factor that has deterred overseas investors from buying Indonesian bonds has been their high volatility. Ten-year yields surged to 9.90 per cent in September 2015 from 7.02 per cent seven months earlier as faltering Chinese growth spooked emerging-market assets. The prospect of a repeat has diminished as Bank Indonesia now regularly intervenes in currency and bond markets, and introduced onshore domestic non-deliverable forwards in late-2018.

One-month rupiah implied volatility dropped to 5.38 per cent last week, compared with its five-year average of 8.44 per cent, and as high as 17.8 per cent in October 2015.

The combination of these positive factors is leading money managers such as Nikko Asset Management to label Indonesian bonds as among the most appealing in the region.

"We continue to be positive on Indonesian government bonds as we believe that there is still room for further monetary policy easing," said Edward Ng, portfolio manager at Nikko Asset in Singapore. "The real yields offered by Indonesia bonds make Indonesia one of the most attractive markets within Asia." BLOOMBERG