Recent turbulence in Indonesian markets has tested the pain threshold for foreigners who invest in the country's longer-term bonds, but they appear to be keeping their nerve. This week, the battered rupiah has stabilized though it remains close to a 20-year nadir. And the yield on the benchmark 10-year rupiah bond has edged closer to 9 percent, adding more than 200 basis points this year.
Still, markets have calmed, for now. Despite capital outflows as Southeast Asia's biggest economy was rattled by an emerging market rout, strong January inflows mean investors have been net sellers of only $61 million this year, based on data as of Sept. 12.
The recent turbulence highlighted Indonesia's heavy dependence on inflows to plug a yawning current account deficit. It also prompted broader moves to promote stability: Indonesia has raised interest rates four times, hiked import taxes and delayed billions of dollars of infrastructure projects.
Jean-Charles Sambor, BNP Paribas Asset Management's London-based deputy head of emerging market debt, said it will stay invested unless bond yields spike significantly higher than 9 percent and Indonesia's central bank failed to step into the market.
"We have to look at the high share of foreign ownership but also we have to take into account that the long end of the curve is held by very strong hands," said Sambor, whose team manages $3.5 billion of investment. "It's not very short-term money. If they decide to hike rates, of course the (yield) curve would flatten but I think that they're unlikely to have a massive exodus on the long end of the curve. That should be because of very sticky money in the 10-year segment and beyond," he said.
Foreign bond ownership peaked at 41.5 percent in January, and dropped to about 37 percent recently and in dollar terms is equivalent to about $56 billion - slightly less than half of Indonesia's foreign-exchange reserves.
Thus if foreigners substantially pulled out of bonds, selling of the rupiah could accelerate beyond this year's fall of nearly 9 percent, threatening a downward spiral.
Handy Yunianto, head of fixed income research at Jakarta-based Mandiri Sekuritas, said most of the nearly $20 billion of inflows Indonesia received in 2016 and 2017 combined would have given negative returns in dollars when the rupiah broke 14,200-14,500 a dollar.
The rupiah is currently around 14,800. Yunianto sees the next break-even rupiah level for those who bought bonds in July-August at 15,525-15,750 per dollar. Over 70 percent of foreign holdings were in bonds with maturity of 5 years and longer, according to government data. The largest sell-off this year was for bonds with 1-year to 2-year tenors, which make for less than 10 percent of total foreign holding and could represent hot money investors.
Neal Capecci, a managing director and portfolio manager at Manulife Asset Management in London, said his fund is staying invested because asset weakness was "probably overdone" and could tolerate further rate hikes to support the rupiah, as long as they were communicated well.
Capecci, whose company manages over $45 billion in Asia fixed income assets, said Indonesia's economy was in "a far superior position" than during the 2013 "taper-tantrum" or the 1997-98 Asian financial crisis. Asked about the circumstances when he might cut his exposure, he said: "Of course, we would if we were in a situation on that we felt that the risks outweigh the rewards of course we have to reduce our positions or remove our positions completely."
A big chunk of investors in Indonesian bonds are benchmarked to JPMorgan Government Bond-Index-Emerging Markets, according to Morgan Stanley Research, while 7 percent of bonds are held by foreign governments and central banks who are likely to be long-term holders.
Nonetheless, Finance Minister Sri Mulyani Indrawati said this week there's a need to lower the level of foreign debt holdings and raise that of local investors. This will take time, and for now, officials hope foreigners will buy more bonds.
"For long-term investors, now is a good time to invest because the return for the medium term is attractive," said Scenaider Siahaan, the finance ministry's director of bond strategy.
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