Indonesia's samurai bonds to return in 2014

“The issuance of Japanese yen-denominated bonds is a possibility in 2014,” Robert Pakpahan, head of the Finance Ministry’s debt management office, said on Monday.

“Japanese investors tend to be quite insulated they are relatively unaffected by the QE [quantitative easing] tapering,” he said.

“We need to diversify our portfolio in anticipation of an uncertain year in 2014 as we are facing the possibility of liquidity reversal back to the US due to the possible QE tapering.”

Indonesia’s latest offering of yen-denominated bonds in 2012 was a blockbuster success. The government reaped 60 billion yen (at that time equivalent to US$748 million) from selling 10-year Samurai bonds, with a coupon of 1.13 per cent only. 

It was the third-issuance of Samurai bonds since their debut in 2009.

The government had been able to sell the Samurai bonds in competitive yields due to the high demand for high-yield assets in Japan, whose key interest rates stand at zero, compared to 7.25 per cent in Indonesia.

But, the government dropped the issuance of samurai bonds this year due to the stronger yen, as well as uncertainty over guarantees from the Japan Bank for International Cooperation (JBIC) which guarantees every issuance of yen-denominated bonds that expired in 2012.

Next year, the government aims to raise around $6.5 billion in foreign currency bonds that may comprise bonds denominated in dollars, Japanese yen or other currencies, such as the euro, Korean won and Chinese yuan, according to Robert.

“We are likely to drop the plan to issue Kangaroo bonds [in Australian dollars] due to their high yields,” he said. 

Nevertheless, the issuance of bonds in euros, won and yuan was “likely” and the government was now “studying” such a plan, he added. Indonesia’s sovereign debt papers were rated the lowest level of investment grade by major rating agencies Moody’s Investors Service and Fitch Ratings, as well as by Japan-based Rating and Investment Information, while Standard and Poor’s rated them one notch below investment grade.

Analysts say that issuing bonds in non-conventional currencies might be a positive breakthrough, but they also warn of possible currency mismatch due to limited supplies of yen, euro and yuan in local banks.

“Our earnings mostly come in US dollars,” said I Made Adi Saputra, a fixed-income analyst with Nusantara Capital. “So if we have to pay the debts in euros, then we’ll need additional currency supply in euros the same thing goes for yen, won or renminbi [yuan].”

Nevertheless, he said, issuing bonds in yen or euros should be seen as a good move ahead of the potentially weaker rupiah against the US dollar that might swell Indonesia’s debt payments.

Given the sizeable proportion of dollar-denominated debts in the economy, every 1,000 rupiah per dollar depreciation would increase Indonesia’s debt liabilities by 90 trillion rupiah, or around 1.1 per cent of its gross domestic product (GDP), Moody’s Investors Service warned in a report released last week.

“The US dollar will become stronger next year due to the pullback of quantitative easing, so we need to start curbing dependency from the US dollar and seek alternative funding sources from other currencies,” added Made.