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Jakarta Post

Komodo bond issuance: A smart policy to tap foreign debt market

  • Yosafat Simbolon
    Yosafat Simbolon

    Currently pursuing a Master of Finance at the Australian National University

New York   /   Fri, February 9, 2018   /   04:35 pm
Komodo bond issuance: A smart policy to tap foreign debt market Finance Minister Sri Mulyani Indrawati (fourth right) pushes a button to symbolize the opening of trading activity at the London Stock Exchange on Jan. 29, while State-Owned Enterprises (SOE) Minister Rini Soemarno (second right) and Wijaya Karya (Wika) president director Bintang Perbowo (third left) wave flags. State-owned construction firm Wika has issued global rupiah-denominated bonds, known as Komodo bonds, worth Rp 5.4 trillion (US$378 million) to finance its infrastructure projects development. (Tribunnews/Tribunnews)

The recent listing of Komodo bond issued by the state construction firm PT Wijaya Karya (WIKA) on the London Stock Exchange (LSE) late January marked an important breakthrough under President Joko “Jokowi” Widodo’s stewardship.

Komodo bonds are bonds issued outside Indonesia but denominated in rupiah, rather than the local currency. The bonds were name after Indonesia’s endemic lizard species, symbolizing that the bond will give the same impression - mighty and strong. 

Unlike foreign bonds that are predominantly denominated in US dollar, Komodo bonds are an intriguing alternative of financing for State Owned Enterprises (SOEs) because it mitigates foreign exchange currency risk for issuer, and simultaneously shifts it to the investors.

For investors, Komodo bonds are means to diversify investors’ own portfolio as they can get calculated exposure to foreign investment. Certainly, the lower face value that Komodo bonds offered, not only is attractive to investors but it also creates greater liquidity.

As one of the emerging markets with the fastest growing economy, Indonesia grows at an average of 5 percent, and is expected to be a major destination of foreign investment. The increasing focus of hard infrastructure projects under the current presidential administration aims to increase connectivity and reduce the inequivalent logistical cost in remote parts of the nation.

According to the National Development Planning Ministry, Jokowi’s infrastructure projects are projected to be Rp 5,500 trillion (US 385 billion) for five years. However, the state budget can only sustain Rp 900 trillion per year. This means that Rp 200 trillion per year will have to originate from external method of financing.

Traditionally, government projects rely heavily on domestic funding including state budget and creative financing. The Public-Private Partnership (PPP) is a financing method that involves the private sector, and was firstly used under President SBY’s leadership.

The decision to go for a market-based method of financing in particular SEOs issuance of Komodo bonds serve to reassure the public of President Jokowi’s commitment to expedite infrastructure projects, and deliver on his campaign promises.

The issuance of a global rupiah bond at the LSE signaled the global investment community of Indonesia’s for foreign investment. In fact, the Indonesian state-run toll road operator Jasa Marga was the first to make the debut of issuing Komodo Bond in London last December. They raised Rp 4 trillion with a carrying coupon rate of 7.5 percent and maturity rate of three year. The issuance was better than forecasted as it was oversubscribed by around four times, marking foreign investors’ enthusiasm and confidence towards Indonesia’s economy.

WIKA became the second issuer of global rupiah bond at the LSE. The state owned enterprise collected Rp 4.5 trillion at a rate of 7.7 percent and a maturity of 3 years. The issuance was oversubscribed by nearly 2.5 times.

Accordingly, 67 percent of the investors originated from Asia, 13 percent from Europe and Middle East, 10 percent from the US and the rest from Indonesia. Hopefully this will set the trend for a following series by other Indonesian SOEs and corporates to support the increasing development and infrastructure projects in Indonesia.

The reason why both Jasa Marga and Wijaya Karya specifically chose to list in London is largely due to the fact the market accounts for 70 percent of the secondary market turnover in international bonds. London Stock Exchange reaches the broadest possible range of investors globally, opening up to a more diverse profile of investors.

The strategic move and boldness to raise capital from foreign market has been a decisive, calculative and quick-witted play due to two main reasons. First, Indonesia has recently received investment grade from three rating companies (S&P, Fitch and Moody’s) in 2017. This has granted Indonesian SOEs a credible credit rating and momentum, while also reassuring foreign investors of the stable economic and business climate in Indonesia, which was primarily a result of higher foreign exchange reserves, narrower current account deficits, and most importantly the ongoing progress on structural economic and fiscal reforms.

Second, the coupon rate offered by Indonesian SOEs offer an attractive rate at above 7 percent which is more than the US dollar-denominated global bond can offer at similar maturity. Thus, this allures investors to bear the risk of the depreciation in Indonesian Rupiah – a negligible threat if the Feds do not unexpectedly change US interest rate.

Having said that, Komodo bond certainly have the potential to create its own market.
The bond’s performance will be tested against its consistency and resilience to exogenous shocks (i.e. Fed rate changes). If it proves to be credible and high-performing, international investors will subsequently seek for longer maturities. Subsequently, large Indonesian financial institutions and other companies from wide sectors will want to tap the market.

With the 2019 Presidential Election fast-approaching, President Jokowi will likely accelerate his infrastructure projects to win a second term. Improved investment climate coupled with continuous fiscal reforms is likely to unlock new capital inflows, which eventually places Jokowi’s economic stewardship in a solid spot.

We are likely to witness more Indonesian SOEs issuing Komodo bonds. PT PLN seems to be the next in line to partially finance the 35000 MW power developments project. Filling two needs with one deed, the recent issuances have been crucial in building SOEs credibility and signaling the global market about Indonesia’s market attractiveness.

Perhaps, 2019 will be the year for Indonesia to make a strong mark. Just as the Komodo, hopefully our nation’s name will strongly soar in the ears of global investors, and we’ll be one step closer to our development targets.


Yosafat Simbolon earned his bachelor degree in Economics from the Erasmus University Rotterdam. He is currently pursuing a Master of Finance at the Australian National University in Australia. Currently, he is also conducting an Economic Affairs internship at the United Nations HQ in New York, the US.


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