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COVID-19 behind decline in corporate bond issuances, analysts say
Analysts have attributed the decrease in bond issuances this year to growing uncertainties in the global economy caused by the COVID-19 pandemic, which has paralyzed the majority of economic activities around the world.
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Finance Minister Sri Mulyani Indrawati talks about the Indonesian economy at a seminar in Jakarta on Feb. 17. (Antara/Rivan Awal Lingga)
The issuance of corporate bonds will likely decline this year as many companies shelve plans to seek funding because of unfavorable global economic conditions, analysts have said.
Indonesia Securities Pricing Corporation (PHEI) president director Yoyok Isharsaya said in Jakarta on May 6 that the company had lowered its bond issuance forecast to around Rp 100 trillion (US$6.66 billion) to Rp 110 trillion this year. The figure is well below its previous forecast of Rp 170 trillion in new issuances or refinancing, he said.
“The slowdown has been apparent since the first quarter of this year when we only saw a total of Rp 21.34 trillion in bond issuances, lower than the Rp 30.39 trillion in the first quarter of last year,” Yoyok told The Jakarta Post via text message.
He attributed the decrease in bond issuances this year to growing uncertainties in the global economy caused by the COVID-19 pandemic, which has paralyzed the majority of economic activities around the world.
In early April this year, the International Monetary Funds (IMF) cut its projection for Indonesia’s GDP growth to 0.5 percent from 5.1 percent in its October projection. Based on the government’s worst-case scenario, economic growth could plunge to 0.4 percent, far lower than its initial estimate of 5.1 percent.
Rating agency Pemeringkat Efek Indonesia (Pefindo) analyst Fikri C. Permana said on May 6 that he expected companies to delay their bond issuances as they waited for the right moment to get a reasonable cost of funding.
“Although Bank Indonesia [BI] has lowered its interest rate, cost of funding is still quite high for companies at this time because the benchmark 10-year government bond yield has risen,” he said.
BI has lowered interest rates by 50 basis points (bps) this year, bringing the benchmark seven-day reverse repo rate down to 4.5 percent.
The low interest rate, however, has not brought down the corporate bond coupon rate, as Indonesia’s 10-year government bond yield currently sits at 8.07 percent, much higher than the 6.5 percent yield it recorded in early March before COVID-19 spread across the country.
Given the situation, Fikri expected corporate debt paper issuances this year to only reach Rp 116.9 trillion, well below last year’s Rp 146.49 trillion. Most of this year’s issuances are projected to be intended for refinancing purposes.
This is reflected in the recent bond offers from two companies, telecommunication infrastructure firm PT Bali Towerindo and paper producer PT Indah Kiat Pulp & Paper.
Bali Towerindo plans to raise Rp 800 billion through the first tranche of its first shelf registration bond to refinance its due debt. Meanwhile, Indah Kiat is offering Rp 3 trillion to help refinance its debts and fund its working capital.
Bank Central Asia economist David Sumual also predicted that the delay in investments among companies was likely due to their efforts to preserve cash in this time of high uncertainty.
“Companies are prioritizing liquidity over expansion to ensure they have enough money to fund their daily operations during the pandemic period,” he told the Post on Monday.
He expected companies to implement efficiency measures to preserve their cash in the short term, including reducing capital expenditure (capex) and operating expenditure (opex) and even downsizing their human resources.
Although such a move might be necessary for companies in the short-term, David worried it would have a significant impact on the economy.
“If all companies make the same moves at the same time, it will have a negative effect on the economy in the medium term,” he said.
To avoid prolonging the effects of the COVID-19 pandemic on the economy, David advised the government to move swiftly in disburse stimulus packages, especially for small and medium-sized businesses.
He also recommended that the government should disburse cash and other social aid to strengthen the public’s purchasing power to drive demand higher amid the pandemic.
