Rupiah gyrations to keep foreign bond bulls at bay

Bloomberg

Foreign buyers are likely to steer clear of Indonesian bonds until the rupiah’s gyrations start to die down. That’s despite the value in the long end of the curve.
International funds fled in the first quarter, with a record $8.7 billion in net foreign outflows, according to exchange data compiled by Bloomberg. Although Indonesian bond performance has improved, global investors still cut holdings by a net $79 million in the first 16 days of April.
The withdrawals have seen a considerable steepening in the Indonesian bond curve as they tend to be more heavily concentrated in the mid-to-long tenors. Foreign participation in Indonesian government bonds has fallen to around 33%, from the 2020 high of 39% before the coronavirus pandemic, with a rush for the exits in February and March causing the spread between two-and 10-year bonds to widen to 193 basis points, the most in nine years.
Local banks and investors were given a leg-up following Bank Indonesia’s decision to cut the reserve requirement ratio last Tuesday in order to free up more capital. This follows the $60 billion credit line with the Federal Reserve on April 7, which improved on dollar liquidity. But for a strong rally in Indonesian bonds to happen, foreign flows need to come on board.
Foreign funds attracted by Indonesia’s relatively high yields are faced with a caveat — that rupiah volatility and the associated costs of hedging may still make the game uneconomical at this point, especially for real-money funds. The spread between one-month and 12-month offshore non-deliverable forwards is around 1,000 basis points — levels last seen during a rout in emerging markets in the third quarter of 2018 or around the time of the U.S. presidential election in 2016.
Bank Indonesia announced on Friday that it will be directly purchasing as much as 25% of the target issuance at the primary auction, with the initial target issuance in recent auctions amounting to 20 trillion rupiah ($1.3 billion). While this may provide some support for bond yields, it will not fully compensate for the decline in bid amounts. The most recent debt sale on April 14 saw incoming bids of 22.3 trillion rupiah, 66% below the average in the first two months of the year.
S&P Global Ratings downgraded Indonesia’s outlook on Friday to negative from stable, while maintaining the nation’s BBB rating, which is two notches above junk.