Indonesia's Year of Living Prosperously

Indonesia's Year of Living Prosperously
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Written by Nachum Kaplan from IFR The 1982 film The Year of Living Dangerously sets a romance against the violent political turmoil that plagued Indonesia in the 1960s. This year, Indonesia will provide the setting for another romance, one between investors and issuers, while turmoil rages in markets far away. The Year of Living Prosperously, if you will. The best guide of Indonesia’s new status as a market darling is the fact that for first time its issuers have access to both the dollar and local currency rupiah markets, giving them the kind of choice and flexibility that they have never enjoyed before. Beyond that, there is the fundamental change in the quality of Indonesian issuer looking to tap the international markets. Indonesia’s spectacular crash during the Asian Financial Crisis 15 years ago was, among other things, the result of too much short-term dollar borrowing putting the exchange rate under extreme pressure. Back then, the rupiah was pegged at artificially low levels against the greenback, making it artificially cheap to borrow in dollars and killing any chance of a local currency market developing. After the crisis, the dollar market was closed to the country’s issuers and the slow task of building a rupiah bond market was undertaken, as was the job of building a local currency loan market to allow Indonesia’s newly recapitalised banks to resume lending to liquidity-starved corporates. Now, both markets are wide open with a rapidly widening investor base to boot – thanks to Moody’s joining Fitch in rating the country investment grade (with S&P tipped to follow soon) . The benefits for Indonesian issuers of being able to choose between the domestic market and the offshore market will become increasingly apparent, especially for the spate of multi-finance companies looking to secure funding. Indonesia’s consumer boom has sheltered it from the wider world’s problems, and is one reason why consumer lenders are queueing up for funding. The romance between characters played by Sigourney Weaver and Mel Gibson in The Year of Living Dangerously was a tale of two people brought together by a certain set of circumstances. Indonesia’s romance with international investors is of very much the same ilk Traditionally, these multi-finance companies have issued in rupiah, which is natural because it matches their revenues. Astra Sedaya and SAN Finance have just issued locally, and FIF and BCA Finance have awarded mandates. The problem now is that rupiah investors, while still flush, have almost had their fill of multi-finance exposure, so issuers increasingly have to pay up to place their paper with rupiah investors. At some point, these generally well-rated issuers are likely to turn to the dollar market, something that would have been impossible not all that long ago. Now that the country has become investment grade, the door to the offshore market has truly been opened. Ready access Better-known issuers such as Semen Gresik and Bank Negara Indonesia, stalwarts of Indonesia’s corporate aristocracy, are now also planning offshore bonds. They are a long way from the deservedly high-yield names that the market is used to from Indonesia (and of which more than a few have defaulted). This means the country’s improved risk profile is reflected in the quality of the average Indonesian issuer. This is not a moot point, because the protracted restructuring of Arpeni Pratama’s debt shows just how quickly things can turn messy in Indonesia. In many respects, however, those troubled high-yield names reflect Indonesia’s past. Now, however, it has risen to be the only country in South-East Asia where issuers enjoy ready access to both offshore and onshore liquidity – barring the Triple A rated odd-man-out, Singapore. Malaysian issuers can tap offshore liquidity in Islamic markets but much less so in conventional ones. This improvement notwithstanding, turning to the offshore market would not be without risk for Indonesian borrowers. With the scars of the Asian Financial Crisis still etched in wiser Indonesian minds, many will think carefully before borrowing in dollars against revenues in rupiah. That is a legitimate concern, but to do give such fears too much weight would be to fail to recognise Indonesia as it is today. While it is easy to be cynical about Indonesia with its rampant corruption and often colourful issuers, the country never went into recession throughout the last crisis, and is forecast to grow at around 5.5% this year. It also boasts one of the world’s best capitalised banking sectors. The CDS market has been tracking Indonesia’s improvement story for some time. Indonesia sovereign five-year CDS is trading at 164bp/168bp, and that assessment of Indonesia’s improving profile has started to become the norm. The romance between characters played by Sigourney Weaver and Mel Gibson in The Year of Living Dangerously was a tale of two people brought together by a certain set of circumstances. Indonesia’s romance with international investors is of very much the same ilk: the time and place do indeed look like a perfect setting, but investors – much like movie-goers – can never be assured of a happy ending. News Source: International Financing Review

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