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Rupiah bonds face 'rising risks'
The Asian Development Bank (ADB) has warned governments in East Asia of the threat from higher borrowing costs and further capital outflows in the bond market, specifically highlighting the vulnerability of Indonesiaâs bond market due to its high dependency on foreign investors
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The Asian Development Bank (ADB) has warned governments in East Asia of the threat from higher borrowing costs and further capital outflows in the bond market, specifically highlighting the vulnerability of Indonesia's bond market due to its high dependency on foreign investors.
The prospects of tighter US monetary policy, coupled with slower economic growth and persistent capital outflows, would lead to 'rising risks' in the outlook for the bond markets in the Asian region, the ADB wrote in its quarterly Asia Bond Monitor released on Thursday.
'Asia's bond markets ' and its borrowers ' are better placed to stand up to this latest round of global volatility than they were in 1997-1998, but tough times certainly lie ahead,' said ADB regional economic integration head Iwan J. Azis.
'The challenge will be to ensure the region can cope with higher borrowing costs and falling asset prices, which could hurt corporate balance sheets and dampen economic growth,' he added.
The ADB specifically highlighted the sharp decrease in market returns on Asian local currency bonds, with the rupiah-denominated bonds particularly in the spotlight as the worst performer among eight local currency bonds issued by those Asian economies tracked in the Asian Bond Fund Index Family Returns.
As of July this year, the average return in the secondary market for rupiah-denominated bonds issued by the Indonesian government was minus 17.8 percent, far below the region's average loss of 3.5 percent as measured in the Pan Asian Index.
Local currency bonds issued by the Philippines and China saw gains of 7.5 percent and 3.1 percent, respectively.
In its report, the ADB notes economies in the Asian region, including Indonesia, have missed the opportunity to raise cheap funds to finance critical infrastructure spending.
The Manila-based organization estimates that Asia needs to spend at least US$8 trillion on infrastructure between 2010 and 2020 to sustain economic growth.
The report also warned that Indonesia's bond market was especially 'vulnerable' to the risk of sudden capital outflows, as nearly one-third of government bonds were held by foreign investors, among the highest foreign ownership compared to other Asian countries.
Indonesia's bond market has suffered the most at the hands of the recent capital outflow in the region, with the yield for its benchmark 10-year government bonds already surging by more than 270 basis points since the beginning of this year, driving up government borrowing costs.
The yields for Indonesia's 10-year bonds hit 8.06 percent this week, the second-highest after Vietnam in ASEAN. However, analysts have argued that Indonesia's high-yield bonds might not be attractive enough to investors as the bearish rupiah and elevated inflation eroded their returns when holding rupiah-denominated bonds.
'Foreign investors might be more keen to invest in the Philippines, which has better returns,' said Adra Wijasena, a Jakarta-based fixed-income analyst with Mega Capital Indonesia. 'Meanwhile,
although our bond offers high yields, it is accompanied with high risks stemming from a weak rupiah and soaring inflation.'
However, the recent headwinds in Indonesia's bond market might only last in the short term, as soon foreign investors would bring more inflows as they realized the country's solid macroeconomic fundamentals, according to Edimon Ginting, ADB deputy country director for Indonesia.
Edimon argued that, although the rupiah bonds might now offer negative returns, with inflation expectations standing at around 9 percent, the country's bond market was attractive for long-term investments.
'One should look beyond the short term, as now the economy is undergoing temporary structural adjustment,' he said on Thursday.
'Our fiscal position is solid, our inflation is showing a declining trend and it is very easy for our economy to grow by 5.5 percent 'that makes Indonesia a good [long-term investment destination], especially when compared to other countries.'
