Financial Markets Indonesia: ORI Bonds & Rupiah Performance in 2014
On Monday (20/10), Indonesia raised IDR 21.2 trillion (about USD $1.8 billion) from the sale of rupiah-denominated retail bonds (Obligasi Negara Ritel Indonesia, abbreviated ORI). This is not only the country’s largest ORI-bond sale ever, but also the largest bond sale in 2014 so far. ORI, which is usually issued once per year, is a bond that is issued specifically to Indonesian retail investors/individuals. The ORI series ORI011 was offered in the period 1-16 October 2014 with a coupon rate of 8.5 percent and a tenor of three years.
The total volume order for ORI011 reached IDR 21.3 trillion with individual offers ranging from IDR 100 million to IDR 500 million according to information from the Finance Ministry.
ORI issuances are always warmly welcomed by individual investors. This year the ORI011 serie had a coupon rate (8.50 percent) that is higher than Bank Indonesia’s key interest rate (BI rate) which is currently set at 7.50 percent. However, ORI011 had a lower rate than the average 12-month time deposits among commercial lenders in Indonesia (8.74 percent in August 2014). But, on the other hand, ORI bonds bear only 15 percent tax, while tax for deposit interest is 20 percent.
Proceeds from the ORI011 issuance will be used to finance Indonesia’s 2014 budget deficit. This deficit may reach IDR 242 trillion, or 2.4 percent of the country’s gross domestic product (GDP).
Indonesian ORI Bond Series:
||Coupon (%)|| Maturity Date
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Indonesian Rupiah Exchange Rate
Although the Indonesian rupiah has appreciated sharply in the past couple of days - primarily on the inauguration of Joko Widodo (who is eager to curb state spending on energy subsidies) as Indonesia’s seventh President as well as on the weakening US dollar amid speculation that the US Federal Reserve will continue stimulus programs as economic recovery in the USA is still sluggish -
Morgan Stanley expects that the rupiah will extend its three-month slide. According to Morgan Stanley, an American multinational financial services firm, the main problem lies in the hostile parliament. The Merah-Putih coalition, involving six political parties that combined secured a majority in Indonesian parliament, may be able to block Widodo’s reform programs. This coalition is led by defeated presidential candidate Prabowo Subianto. In the past month, the coalition managed to show its strength as it was able to pass a new law that abolishes direct elections in the regions, and managed to elect speakers in parliament (DPR) and the People's Consultative Assembly (MPR) from its own ranks. Meanwhile, the coalition of political parties that support Widodo constitutes only 37 percent of parliament.
Morgan Stanley downgraded its 2014 year-end projection for the rupiah to IDR 12,600 per US dollar (from IDR 11,500 per US dollar previously). Apart from the aforementioned political concerns, the US-based bank also believes that Indonesia is more vulnerable to capital outflows ahead of looming higher US interest rates due to relatively low foreign exchange reserves (compared to its neighbouring countries) and its wide current account deficit. In the second quarter of 2014, the country’s current account deficit reached USD $9.1 billion, or 4.27 percent of GDP.
Indonesia needs capital inflows to curb the current account deficit but doubt has emerged whether the current political and economic context is able to convince global investors to invest in the country. Foreign funds have already pulled USD $1.1 billion from local shares since the end of August 2014 according to information from Bloomberg.
In the past three months, the rupiah has been the worst-performing emerging Asian currency against the US dollar.
Ahead of higher US interest rates (expected in mid-2015) Indonesia is particularly vulnerable to capital outflows because there is a large foreign presence in the country’s financial markets. Foreigners hold 37 percent of Indonesian securities. In times of global shocks, when global investors pull funds out from riskier assets, Indonesia will thus be hit harder than its neighbouring countries where foreign presence in financial markets is smaller.
International financial institutions are also concerned about limited improvement of Indonesia’s current account deficit. Despite having raised subsidized fuel prices in June 2013 and raising the country’s key interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.50 percent in November 2014, the wide current account deficit has not shown a marked improvement. In fact, it has stayed at the same level. Therefore, Widodo’s plan to raise subsidized fuel prices again before the year-end is well received by international institutions and investors. Speculation emerged that Widodo will raise these prices (gasoline and diesel) by about 50 percent in November. For this move he does not require approval from parliament. Curbing state sponsored energy subsidies would free-up funds for much needed economic and social development, including infrastructure, education and healthcare.
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