Indonesia has attracted a great deal of attention over the past 12 months and with foreign investment in its government bonds reaching a record high in January, is it too much too soon for the emerging market?
Citywire Global has spoken to fixed income managers running billion dollar emerging market debt portfolios to find out?
The managers in question are: Alexander Kozhemiakin, manager of the $3.7 billion BNY Mellon EM Debt Local Currency fund; Caroline Gorman, co-manager on the $2.52 billion Julius Baer Local Emerging fund; and Peter Eerdmans, lead manager on Investec’s $2.68 billion Emerging Markets Debt fund.
‘Current heavy foreign holdings in the tradable local currency government debt is a concern. The central bank, the Bank Indonesia, has, since the second half of 2011, intervened in this market and accumulated government paper on its own books to stabilise the market.’
'The strong 2011 surge in foreign direct investment inflows will likely be tempered by the more cautious global economic environment in 2012.’
‘It is true that foreigner investor positions in Indonesia's government bond market are around historical highs at the present time. This, combined with the fact that bonds have rallied sharply this year prompted us to take profits and reduce our Indonesia holdings.’
Central bank role
‘The central bank continues to be the most active central bank in Asia with another rate cut this month, while, earlier in the month, it lowered the deposit ratio for banks, meaning it effectively cut rates by a total of 0.75% in January.’
‘With sufficient import cover and a flexible exchange rate, the Indonesian economy is better equipped to manage any overheating stresses. The longer term outlook for the economy hinges heavily on progress in structural reform regarding corruption, improving the legislative process and infrastructure.
‘Bank Indonesia must also aim to maintain credible monetary policy and avoid cutting interest rates too aggressively as global risk aversion can lead to portfolio outflows as well as resumed pressures on the IDR.’
‘The fact its economy is relatively closed means it has weathered the global slowdown much better than many other countries in the Asian region. We believe that over the long term, Indonesia's fixed income market is a very sound investment. Two of the three major ratings agencies have already classed it as investment grade.’
‘From a credit perspective, Indonesia has outperformed its rating peers in the BB category on the matrix of both public and external finances. Accordingly, we agree with Indonesia's recent upgrades to the investment grade rating category of "BBB- and above" by Fitch in late-2011 and Moody's last month. With the improved credit fundamentals, we continue to like the Indonesian USD bond position.’
‘We expect Standard & Poor’s to upgrade Indonesia to investment grade status in the next couple of months, which should prove positive for both bonds and currencies, although bonds are already trading quite expensively.’
‘On the macro economy, Indonesia is expected to grow at over 6% in 2012. The economy is not yet overheating as 6.3% growth is not far above the country's growth potential.’
‘In addition, there continues to be excess capacity in the system and the current account deficits as well as fiscal deficits at around 1% of GDP are not wide compared to earlier periods or other sovereigns. In addition, inflation, while likely to be on the rise, is not on a runaway path.’
‘Indonesian government bonds were the top performer for our fund last year but we are more cautious this year considering how much the market has rallied, and the heavy offshore positioning, which could make the market quite sensitive to an upside inflation surprise for example.’
‘Indonesian bonds performed very well in January as a result of the interest rate cuts by the Bank of Indonesia, while the rupiah was one of the weakest performing currencies as the carry appeal diminishes. We remain overweight in the rupiah, neutral in local currency debt and overweight in hard currency debt.’