JAKARTA: Indonesia will cut its remaining 2010 debt issuance by 26 percent, including scaling back a global sukuk, after lowering its forecast for the budget deficit this year as it sees faster growth and stronger revenues.
The move to cut its debt issuance by 15 trillion rupiah ($1.7 billion), out of 58 trillion rupiah worth of debt still to be issued, spurred longer-dated bond prices as investors bet the deficit cut could lead to a much-sought after investment grade credit rating.
Foreigns have bought a record amount of Indonesian bonds this year, drawn by the country’s robust economic growth, hopes of a credit upgrade and expectations that its rupiah currency will continue to appreciate.
"We even have a budget surplus in the first half. So I suspect the government would be reluctant for a huge global issuance this year," said Arga Samudro, bond analyst from brokerage Bahana Securities in Jakarta.
The government has so far raised about 120 trillion rupiah in bonds this year, or two-thirds of its original gross issuance target of 178 trillion rupiah.
Prices of longer-dated Indonesian bonds jumped after the government cut its deficit target on Tuesday. Benchmark 15-year bond yields dropped 19 basis points to a fresh record low of 8.88 percent.
A finance ministry source told Reuters the issuance cut would include a global sukuk planned for October, part of the government’s aim to develop the Islamic finance industry in the world’s most populous Muslim nation.
Its higher-yielding local currency sukuk has seen less demand than conventional bonds, with the finance ministry again raising less than targeted in an auction on Tuesday, because of investor worries that the sukuk market lacks liquidity.
"The global sukuk will be downsized because up to now the government has still booked a budget surplus," said the source familiar with the sukuk issue, who declined to be identified as the details were not public.
Indonesia has cut its financing by about 37 trillion rupiah ($4.1 billion) this year — a reduction of about 28 percent — including the debt issuance cut, because the government now expects a 2010 budget deficit equivalent to just 1.5 percent of gross domestic product, versus an earlier projection of 2.1 percent, the finance minister said on Monday.
The financing cut is equivalent to 3.3 percent of its previously planned total expenditure for its 2010 budget.
The smaller deficit comes as economic growth is set to be slightly faster than expected at 5.9 percent in 2010, while the government failed to spend all its revenues in the first half, a problem analysts say it needs to overcome to improve infrastructure.
Foreign demand for Indonesian local currency debt remains strong, with net foreign ownership at a record 169 trillion rupiah or over a quarter of all outstanding debt.
A combination of the debt issuance cut, the central bank’s insistence that it will not raise interest rates this year, and expectations that Indonesia could join BRIC nations with an upgrade to investment-grade status have been driving buying.
According to the JP Morgan GBI-EM Indonesia’s index, Indonesian local bonds have returned 20 percent so far this year, including currency gains, after generating nearly 40 percent returns in 2009.
"The supply of government bonds will be smaller (after the issuance reduction) and so investors will chase bonds in the secondary market.
This also means the government’s funding costs will be lower," said Fauzi Ichsan, econmomist at Standard Chartered.
Other Indonesian assets have also benefited from strong overseas interest. Jakarta’s key stock index has gained 20 percent this year, outperforming far larger bourses, while the rupiah has risen nearly 5 percent against the US dollar. –Additional reporting by Aditya Suharmoko and Janeman Latul.