Indonesian bonds hit by foreign fund outflows on policy woes

[JAKARTA] Foreign investors sold Indonesian government bonds again last month, underscoring concerns over the government’s plans to increase spending and raise the deficit limit.

Overseas funds sold a net US$1.8 billion of Indonesian bonds in October, bringing outflows in the past two months to more than US$4 billion, on concerns over the central bank’s autonomy, as well as fiscal discipline following the change in finance minister. That shaves this year’s overall inflows to US$305 million.

Global investors have been concerned that Purbaya Yudhi Sadewa, who became finance minister in September following protests over living costs across the country, would not maintain the decades-old state budget deficit cap of 3 per cent of gross domestic product. Nathan Sribalasundaram, rates strategist at Nomura, said that funds are also cautious about tax revenues and spending on government programmes.

“We will probably still see some small outflows in the next few weeks,” he said.

The exodus by global funds contrast with inflows from domestic investors. Local banks, mutual funds, insurance and pension funds, flush with liquidity from the government’s cash placement in state banks, all boosted government bond ownership in October from September, official data show.

What’s more, the country’s stocks saw the highest inflow in a year in October as falling bond yields made local equities look more attractive. The benchmark 10-year yield dropped around 30 basis points last month to 6.08 per cent on rising domestic demand, though it rose in the latter part of the month from a low of 5.93 per cent. It closed at 6.17 per cent on Tuesday (Nov 4).

While the bond rally underscores Indonesian domestic investors’ strength, it’s also a warning, said Handy Yunianto, head of fixed income research at Mandiri Sekuritas.

“Over-reliance on local liquidity could eventually crowd out productive lending and, if unchecked, blur the lines between fiscal and monetary policies,” he said.

Indonesia is taking steps that might woo global funds back to the bonds. For instance, Purbaya has said that the government would not remove the 3 per cent ceiling before the economy could grow faster. And he said last week that they will avoid the so-called “burden sharing” plan with Bank Indonesia (BI) as much as possible going forward, retreating from an agreement in September that had aroused concerns about BI’s independence.

SEE ALSO

“Policy clarity and credibility are key” to restore foreign interest, said Yunianto. “The government must ensure that fiscal expansion remains temporary and targeted, while Bank Indonesia’s communication should continue to emphasise data-dependence and the rupiah’s stability.” BLOOMBERG