Indonesia’s Kangaroo bond sale a tricky call for local investors

INDONESIA’S plan to issue its first Australian dollar-denominated debt next month has piqued investor interest, though questions mount on how it’ll fit into local managers’ portfolios. 

Australia’s sovereign Kangaroo market isn’t large and Indonesia’s issuance is not aligned with the more well known supranational debt from developed markets, according to Betashares Capital. Funds may also be unable to hold the bonds due to Indonesia’s low investment grade credit rating, according to Jamieson Coote Bonds. 

“An EM (emerging market) kangaroo bond doesn’t exactly fit neatly into the traditional Australian bond sectors,” said Chamath de Silva, head of fixed income at Betashares in Sydney, who may buy the bond if it gets included in major indexes. “That said, if the concession is attractive, I’m sure local real money might be tempted.” 

It points to a tricky debt sale should Indonesia follow through on its plan as it seeks to diversify funding sources and deepen ties with Canberra. It would be just the second emerging-market sovereign to issue Australian dollar debt in a market that typically sees developed issuers such as the Canadian provinces and supranationals such as the European Investment Bank.

The planned issuance comes as Kangaroo market sales hit A$41 billion (S$34.3 billion) this year, on track to top a record A$61 billion worth of deals last year, according to data compiled by Bloomberg. It follows South Korea issuing an Australian-dollar bond last year.

The issuance is likely to be targeted at sovereign wealth funds and reserve managers rather than Australian funds given that liquidity may be low, said Prashant Newnaha, a senior Asia-pacific rates strategist at TD Securities in Singapore. But “it’s clear there is a significant pool of Australian dollars to tap”, he said.

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While Indonesia’s planned offer is interesting, it would not meet the rating requirement of a number of our portfolios, said James Wilson, a senior portfolio manager at Jamieson Coote in Melbourne. The South-east Asian nation is ranked Baa2 at Moody’s Ratings, the second-lowest investment grade.