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While most global economies are dealing with an economic downturn, Indonesia has posted stable growth figures for most of the year. In emerging Asia, Indonesia bonds have attracted a lot of foreign money, as the US Federal Reserve scales down interest rate hikes, while China’s reopening spurs the outlook for Asian economies.
A report by Bloomberg showed that global funds picked up $1.5 bn worth of Indonesia bonds in November, the most in three years, and nearly the same amount till December 16. The fixed-income market of the Southeast Asian economy had seen a heavy drawdown from foreign investors, with total outflows of $7.5 bn in 2022.
Indonesia bonds back in vogue
Emerging market economies came under pressure as the rally in the US Dollar and persistent rate hikes by the US Fed attracted led to an exodus of foreign money. Indonesia bonds, considered a benchmark for debt investing in the region, have outperformed other Asian peers.
The current yield on Indonesia 10-year government bonds is hovering around 6.9%, whereas Bank Indonesia’s key interest rate stands at 5.25%. The central bank of the country is likely to slow the pace of rate hikes as November headline inflation came in at 5.4%, down from 5.7% posted in October.
The 10-year real yields for Indonesia bonds are much better than what is offered by China, India and Malaysia, and investors seem to be betting on the asset class going into 2023.
Societe Generale in a recently published note said it sees Bank Indonesia approaching the end of its rate hike cycle. DBS Bank is bullish on Indonesia’s government bonds going into 2023.
“We like IndoGBs for Indonesia’s faster fiscal consolidation, strong balance of payments and comfortable domestic liquidity (supports bond demand). As short US rates peak in 1Q and EM sentiments stabilize, foreign bond flows should also turn around and we expect USD3-7bn of net inflows in 2023,” writes Duncan Tan, Rates Strategist-Asia, DBS Bank. DBS expects Indonesia’s sovereign debt to outperform in the next three to six months.
The S&P Indonesia Bond Index shows returns of 3.26% in 2022 as of December 16. This is despite the heavy outflows from emerging market bonds.
Asian debt is getting more attractive for foreign investors, and government data showed that Indonesia’s rupiah sovereign notes attracted $467 m on December 5 alone, the largest one-day inflow since August 2021.
“We hold a constructive view on Indonesian bonds going into 2023. Demand will likely find support when upward pressure on global bond yields eases as market focus turns to their attractive real yields relative to regional peers. The government has also committed to bringing the fiscal deficit back down to below 3% in 2023, which is positive for Indonesian government bonds,” Nikko AM said in a research note.
