Risk perceptions on Indonesian debt have risen amid concerns over the fragile rupiah. So far in 2018 the Indonesian rupiah has depreciated around 6 percent against the US dollar due to US monetary tightening and simmering concerns over the outbreak of a global trade war. Waning risk perception is reflected by the rising credit default swap (CDS) of the five-year Indonesian bond.
The CDS of the five-year bond is an indication of the strength of government debt papers. It touched a recent peak level of 144.47 basis points (bps) before the end of June, before gradually easing to 138.44 bps on Wednesday (04/07).
Around the start of the year, on 9 January 2018, Indonesia's CDS had touched a five-year low of 76.92 bps when the Indonesian market was in a bullish trend after Fitch Ratings had raised Indonesia's sovereign credit rating to the second-lowest investment grade. This decision came only a few months after S&P Global Ratings had lifted the nation out of junk status.
According to Ramdhan Ario Maruto, Associate Director Fixed Income at Anugerah Sekuritas Indonesia, the level of Indonesia's CDS is particularly affected by the movement of the rupiah. The rupiah has been weakening heavily since February 2018, especially due to monetary tightening in the USA and simmering trade tensions. Problematically, foreign investors hold nearly 40 percent of total government bonds and as part of this group rapidly sells the nation's assets in times of global turmoil, there occurs a widening CDS spread, suggesting a change in perceived market risk in sovereign credit.
Besides the fragile rupiah, Indonesia's CDS is under pressure due to a clear deterioration in the emerging market outlook.
Maruto added that investors indeed need to be careful amid present volatile times where external factors can rapidly cause damage. The higher CDS (CDS being a gauge of market fear) reflects the higher level of risk in the market, thus causing government bond yields to rise.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.15 percent to IDR 14,409 per US dollar on Friday (06/07). Pressures are rising after US President Donald Trump confirmed that 25 percent tariffs on USD $34 billion of Chinese imports will be imposed starting from 12:01 am local time this Friday. The tariffs are imposed on Chinese products ranging from farming plows to semiconductors and airplane parts. China vowed to hit back by imposing tariffs on US goods ranging from soybeans to pork. However, markets are concerned that the conflict will escalate further.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia