Indonesia's 10-year government bond yields are currently around 6.89 percent, or the highest among Asian nations. On the one hand, this makes Indonesian bonds attractive to investors but on the other hand it becomes more costly for the government. How come Indonesian bond yields remain high?
Handy Yunianto, Head of Fixed Income Research at Mandiri Sekuritas, sees three factors that explain why Indonesia's bond yields remain higher compared to those in other Asian countries. Firstly, Indonesia indeed saw its credit ratings being upgraded to investment grade status by Standard & Poor's (S&P) in May 2017 (unlocking a potentially huge amount of capital inflows) but compared to many of its regional peers Indonesia's ratings remain less competitive.
Secondly, Indonesia's inflation rate has been rising since the year-start due to administered price adjustments (higher electricity tariffs for specific households as the government is eager to reduce costly energy subsidies). Hence Indonesia's key interest rate, the 7-day reverse repurchase rate, is also relatively high at 4.75 percent (where it has been since October 2016) compared to other nations. Today (15/06) the central bank of Indonesia will complete its June policy meeting. It is expected to leave its monetary policy unchanged.
Thirdly, the Indonesian rupiah is (historically) more volatile compared to currencies in other Asian markets.
Yunianto added there is a chance that this situation changes in the future, but it will likely require an improvement in the fundamentals of the Indonesian economy as well as another ratings upgrade (higher into the ranks of the investment grade) by Fitch Ratings and Moody's Investors Service. As such, he advises the Indonesian government and Bank Indonesia to continue their quest to improve the macro-economy of the country, as well as to safeguard a stable inflation environment and stable rupiah rate. While inflation is currently peaking it should decline again next year because the impact of rising electricity tariffs vanishes. Meanwhile, for the last couple of months, the rupiah has been stable around the IDR 13,300 per US dollar level.
The Indonesian government is also advised to engage more in hedging for example in interest rate swaps to make investors more confident about investing in Indonesia.
Anup Kumar, analyst at Maybank Indonesia, agrees that it will require some time before Indonesia can really enjoy its recently obtained "investment grade status" from S&P. In the meantime it is key for the Indonesian government to safeguard macroeconomic stability and to make sure that the targets set in the state budget are achieved. This would provide some downward pressure on Indonesian bond yields although the external environment remains difficult to predict.
A challenge is that Bank Indonesia has limited (or no) room to cut its key interest rate further in the short-term, implying a decline in yields should be encouraged by other factors than lower interest rates.
Local Currency Yield State Bonds:
Source: Bisnis Indonesia