Indonesia Bonds Set For Biggest Weekly Loss Since March
Indonesia's bonds headed for the biggest five-day loss in eight weeks and the rupiah fell after Standard & Poor's cut the nation's credit-rating outlook.
The yield on 10-year sovereign notes rose to the highest level in three weeks after S&P changed its outlook to stable from positive Thursday, partly due to the "stalling of reform momentum." It maintained Indonesia's rating at its highest junk level of BB+. Both Moody's Investors Service and Fitch rate Southeast Asia's largest economy the lowest investment grades.
"There were expectations for a rating upgrade this year and this revision takes that off the table," said Suriyanto Chang, head of treasury at Bank QNB Kesawan in Jakarta. "The negative sentiment will only last a few more days before bonds begin rallying again as investors seek higher yields."
The yield on the 5.625 percent notes due May 2023 climbed 10 basis points this week to 5.58 percent as of 10 a.m. in Jakarta, the most since the five days ended March 15, prices from the Inter Dealer Market Association show. The yield rose two basis points Friday.
The government delayed its plan to reduce fuel subsidies until after the budget is revised to include compensation programs for the poor, President Susilo Bambang Yudhoyono said April 30, indicating the revision is expected to come in May.
"The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months," S&P said in a statement Thursday.
Currency market
Overseas funds added 18 trillion rupiah ($1.8 billion) to their local debt holdings in April, finance ministry data show. The rupiah declined 0.2 percent this week to 9,740 per dollar, the most since the five days ended April 5, prices from local banks compiled by Bloomberg show.
The currency traded at a 0.6 percent premium to one-month non-deliverable forwards, which fell 0.6 percent in the five days to 9,795 per dollar, the biggest drop since the week through March 22, data compiled by Bloomberg show. The spot rate and the forwards slipped 0.1 percent Friday.
A daily fixing used to settle the derivatives was set at 9,744 Friday by the Association of Banks in Singapore, compared with 9,720 on April 26.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, dropped three basis points, or 0.03 percentage point, to 5.64 percent. It rose 10 basis points Friday.
Bloomberg
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http://www.thejakartaglobe.com/opinion/editorial-sp-downgrade-a-wake-up-call/
Editorial: S&P Downgrade a Wake-Up Call
Indonesia has been enjoying the limelight for some time now as the darling of the international investment community. The country is widely perceived as a fast-emerging economy and a possible global economic heavyweight.
The country has posted robust economic growth for years, which has enabled the government to improve infrastructure, education and health care. Progress has also been made in other areas, but evidently it has not been sufficient.
In a wake-up call for both the country and the government, rating agency Standard & Poor's cut its rating outlook on Indonesia's debt to stable from positive, citing stalling of reform momentum and a weaker external profile. These factors have reduced the chance of an upgrade over the next 12 months.
One of the major factors contributing to the lowered outlook is the impasse in the country's structural reforms as well as rising external debt and deficits in current account. It is telling that the agency noted that the government is fast losing its ability to maintain the country's creditworthiness given the dual deficits. Tackling the current account deficit and the budget deficit must be a top priority.
At the heart of this is the amount of money the government is spending on fuel subsidies, which is expected to exceed $30 billion this year. It is imperative that the government move on this issue.
"Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia's growth potential, thus delaying poverty reduction and economic development," S&P said. "Political considerations related to next year's parliamentary and presidential elections appear to increasingly shape policy formulation."
What this alludes to, is that the government is pursuing populist policies ahead of the elections. This may not be entirely true as the government has got many policies right. But the downgrade should not be taken lightly lest it snowball into a crisis.
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