THERE MUST BE big smiles at the Republic of Indonesia’s debt office. In just seven business days this month, the team there has managed to complete the country’s funding needs for the year: a chunky €3bn seven- and 12-year Reg S/144a deal priced on June 7 while a ¥100bn (US$959m) three and five-year Samurai priced last Wednesday. A job well done.
Long gone are the days when Indonesia was the flat-footed klutz to its regional sovereign peer the Philippines. While the latter managed to dazzle with exquisitely timed drive-by dollar deals, Indonesia used to earn brickbats for painfully drawn-out marketing periods which destroyed price tension and often led to lousy secondary market deal performance.
But over the last few years, the Philippines’ offshore issuance profile has diminished thanks to a reduction of its outstanding offshore debt via liability management and a focus on domestic issuance. Spotting an opportunity, Indonesia has stepped in as Asia’s sovereign poster boy.
It’s just as well given the scarcity of offshore sovereign paper from the region – but that might well change. Fiscal deficit ratios are rising across the region as economic growth slows. Indonesia has raised its deficit ratio to 2.58% from 2.15% – hence the sudden assault on the offshore bond markets in the face of a US$4.2bn budget shortfall.
MEANWHILE, THE OUTGOING Aquino administration in the Philippines chalked up its biggest budget deficit for a few years of 0.9% last year. That’s well within the 2% cap set out under Philippines law but it won’t be long before that is breached – especially with incoming president Rodrigo Duterte pledging to transform the country’s wanting infrastructure landscape.
Those numbers pale in comparison with Japan’s hefty fiscal deficit of 6% and China’s 3%. But the shift is symptomatic of the “post-Tiger” reality which has descended on South-East Asia.
While the Philippines is the star performer in GDP growth terms of the region – it registered growth of 5.8% last year – that is nowhere near the double digit growth which powered the region for decades.
Mr Duterte has pledged continuity with the economic policies of his predecessor. Considering his controversial policy prescriptions for the country, which seem to embrace a nonchalance towards the rule of law when it comes to bringing down the crime rate, he can ill-afford to screw up economically speaking.
Nevertheless I see a strong possibility of the budget cap being revised upwards and an equal possibility of the Philippines returning as a regular supplier of Asian sovereign benchmark offshore paper.
Spotting an opportunity, Indonesia has stepped in as Asia’s sovereign poster boy
THE COUNTRY WOULD be well advised to take a leaf out of Indonesia’s book. It has, after all, managed to execute two of the most satisfying deals – from the issuer’s perspective – of the year so far.
Its euro deal might have drawn flack from some quarters for having priced too cheaply in relation to where the Republic could have raised dollar funds. The seven and 12-year tranches theoretically swapped back at much cheaper levels to dollar Libor than Indonesia could have achieved by tapping the primary dollar bond market.
But a banker involved in the trade told me he didn’t think Indonesia had swapped back to dollars on the deal and was simply booking the euros for future economic disbursement, and anyway has a natural hedge in its need for the currency.
That looked rather smart if you consider the euro/rupiah spot rate was close to its all-time high (involving a weak rupiah) at around the time the deal priced. If Brexit happens it will take some of the shine off the euro on speculation the whole monetary union project would then begin to look imperiled.
Meanwhile the foray into the Samurai market really hit the spot, even if it was a quasi private deal anchored by a series of hefty tickets. But paying sub 1% coupons over the next five years in a currency which is in the midst of a secular decline is terribly smart as far as liability management is concerned. Sure, the likes of JBIC and GIC might have sponsored the deal, without which arguably it couldn’t have got done.
But hey, in a market where Japanese government bonds are negatively yielding and non-government bond supply is a desert, what could be better than booking a Triple B sovereign that has a semblance of yield?
I could suggest as I have done before in this column that it’s about time Japanese investors embraced high-yield, since the Indonesia trade and a few before it in Samurais for Mexico and Bank of America demonstrate that there is a willingness to go down the credit curve emerging over there.
The concept of Japanese high-yield finally emerging against a negative yield drop is rather amusing and I won’t pause to laugh at what strikes me as a rather hilarious proposition. But I’m pretty sure a Single B issuer with name recognition which offers a 4% yield right now might well finally break the Japanese high-yield duck. One is tempted to write: LOL.
