Indonesia has attracted significant investment from foreign investors. Fitch upgraded Indonesia's sovereign credit rating to BBB- from BB+ in December 2011. The rating outlook by Fitch on Indonesia is stable. The rating upgrade was driven by the country's strong and resilient growth, declining public debt ratios, strengthened external liquidity and a prudent macro policy framework. The upgrade by Fitch was followed by Moody's upgrade of Indonesia's foreign and local-currency rating to Baa3 from Ba1 in Jan 2012. Moody's outlook on Indonesia's ratings is stable. S&P still rates Indonesia as junk at BB+. However, the rating outlook is positive.
Indonesia's gross domestic product (NYSEMKT:GDP) growth has remained above 5.5% YoY since the fourth quarter of 2009. The GDP growth for 4Q2012 was 6.1% YoY, lower than the 6.2% YoY growth witnessed in 3Q2012. The full year GDP growth stands at 6.2% YoY for 2012. Though this is lower than the government's initial target of 6.5%, the growth is resilient in the current global macro-economic environment.
Inflation has historically been one of the major concerns for Indonesia. During the Asian crisis of 1998, Indonesia witnessed very high inflation before witnessing deflation in 2000. Inflation again shot up in the first half of 2006, before declining by the year-end. However, Bank Indonesia has been successful in maintaining inflation below 6.0% since May 2011. Bank Indonesia's target inflation rate is 3.5% to 5.5%. Inflation was higher than expectations at around 4.6% in January 2013, which can be attributed partly to the floods in Jakarta and hike in electricity tariffs during the month.
The Indonesian USD-denominated bond market has received significant interest from the fixed income investors. The Indonesian high yield credit space is a small segment in the emerging markets HY bond space. There is limited supply and the supply from Indonesia property sector is even more limited. The technical factors have been supportive of the Indonesian credits.
The year 2013 has seen three USD-denominated junk bond issuances from Indonesia, while there has been a flood of issuances from China. PT Gajah Tunggal Tbk, the largest integrated tire manufacturer in Indonesia, issued USD 500mn notes maturing in 2018 at a coupon of 7.75%. The bonds are rated B2/B+ by Moody's/S&P. Indika Energy, which is rated B1 by Moody's and B+ by S&P, issued USD 500mn notes maturing in 2023 at a coupon of 6.375%. Lippo Karawaci, a property developer, added USD 130mn to its existing USD 273mn notes maturing in 2020. We expect primary supply in 2013 from a few companies such as PT Bank Rakyat Indonesia, Tower Bersama Infrastructure Tbk and PT Semen Indonesia Tbk.
We expect the Indonesian economy to grow at 6.0% YoY in 2013, versus the government's target of 6.8%. Bank Indonesia has maintained interest rate at 5.75% at its policy meeting in February 2013. However, we expect a tightening of the monetary policy during the year, given the expected inflationary pressures. We expect macro-economic conditions to remain stable in Indonesia, which is likely to support the investor sentiment in the Asian bond markets. If the markets conditions remain favourable, we may see new supply of bonds from Indonesia.
Source for the data and numbers: Bloomberg
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