Goldman sees Indonesia luring $5 billion from Japan on S&P

Bloomberg

Indonesia is set to attract as much as $5 billion in funds from Japan should S&P Global Ratings raise the nation’s debt rating to investment grade, according to Goldman Sachs Group Inc.
S&P will probably lift Indonesia’s debt rating to BBB- within the next six months from BB+, as the government has pushed forward with fiscal reforms, Danny Suwanapruti, a Singapore-based analyst at Goldman, wrote in a report. An upgrade to investment grade would boost its appeal among conservative Japanese institutional investors, he wrote.
S&P is the last of the three main credit-rating companies to keep Indonesia on junk status. While it is “broadly optimistic” about its economy, concerns remain about the country’s corporate and banking sector, S&P director Kyran Curry said in October.
“We believe Indonesia attaining investment grade by all three rating agencies could potentially unlock a new source of inflows particularly from Japanese investors,” Goldman’s Suwanapruti said. “It would become one of the highest-yielding investment-grade markets in the world.”
Inflows into Indonesia from Japan could amount to $3 billion to $5 billion over the next year, according to Goldman. This compares to current Japanese holdings of local-currency government bonds of $2.2 billion, the analyst wrote.
The benchmark Indonesian debt offers the highest yield in Asia after Pakistan. An upgrade would strengthen President Joko Widodo’s case that his reforms are moving the nation into a higher growth path, just as he seeks to resolve a dispute with Freeport-McMoRan Inc. over the operation of the world’s second-largest copper mine.
If an S&P upgrade were to lead to Indonesia’s inclusion in the Bloomberg Barclays Global Aggregate Index, a measure of investment-grade debt, it would likely prompt inflows of $2 billion on top of the Japanese funds, according to Goldman.
Indonesia is a good market for carry trades and the rupiah is set to outperform its Asian peers, Suwanapruti wrote. In carry trades, investors seek to borrow cheaply in one currency to buy those of nations with higher yields.
Rupiah has declined only 0.1 percent versus the dollar this month, even as other Asian currencies weakened as much as 1.6% on the prospect of an interest-rate hike by the Federal Reserve as soon as March.
Indonesia’s benchmark 10-year debt yields about 7.5%, about 5 percentage points more than Treasuries of similar maturity. Goldman’s positioning survey of global real-money funds showed that foreign investors are overweight Indonesia relative to the benchmark, according to the
report.
Global funds have been net buyers of 27.6 trillion rupiah ($2.1 billion) of Indonesian government bonds this year, according to data from the finance ministry.
Moody’s raised Indonesia’s rating outlook to positive in February, after Fitch made a similar move in December. An upgrade by these firms would lift the nation’s ratings to two levels above investment grade.