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Aviva bullish on Indonesian rupiah bonds

Despite a depreciation of the rupiah this year, Indonesian bonds have been upgraded by ratings agencies and will also be included in an international index this year, explains Stuart Ritson, head of Asian rates and FX at Aviva Investors.
Aviva bullish on Indonesian rupiah bonds
Stuart Ritson, Aviva Investors

From the beginning of this year, Indonesian rupiah bonds have delivered flat returns. Ritson believes the major reason for a under-performance was a slight depreciation of the currency due to the central bank’s moves to offset the effect of large foreign investment inflows.

The local currency bond market, however, remains attractive due to “a substantial decline inflation and attractive valuations [which] delivered decent inflation-adjusted yield,” he said, adding that he expects a 3.5% inflation-adjusted yield in 2018.

Ritson expects Indonesia’s economy to continue growing while inflation remains under control. The Investors Emerging Markets Local Currency Bond Fund, which he manages, has an 11.1% allocation to Indonesia, the largest country exposure in the portfolio, according to FE.

Index inclusion

Last month, Bloomberg said it would include Indonesian rupiah-denominated debt in its Bloomberg Barclays Global Aggregate Index beginning in June. The index tracks investment grade bonds in 24 local currency markets, including the Singaporean dollar, Malaysian ringgit and Thai baht.

“Investors that are benchmarked to this global aggregate index will begin to increase their allocation and start to build position in Indonesia government bonds,” Ritson said.

The inclusion is expected to trigger an additional $5bn of global demand for the bonds, he noted. “To put that in context, for the whole year 2017, there was $12bn in inflows [to Indonesia government bonds]. It would give you some sense of the importance of the index adjustment.”

Prior to the inclusion, Indonesia’s government bonds were re-rated to investment grade from its junk status by credit rating agency Standard and Poor’s in May last year.

Indonesia regained its investment grade from Fitch Ratings in late 2011 and from Moody’s Investors Service a month after that.

This is the first time since the outbreak of the Asian financial crisis in December 1997 that Indonesia’s bonds have been rated “investment grade” by all three major ratings agencies, namely S&P’s, Moody’s and Fitch, Ritson noted.

“The rating upgrade does broaden out the investor base.”

“Previously, the majority of investors would have been dedicated emerging market debt funds and some crossover funds, but now we will probably see a wider range of investors.”

Risks to local currency Indonesian government bonds include liquidity, he said. Outside the country, rupiah-denominated government bonds are not widely held and do not have strong demand.

Another risk is on the domestic front. In 2019, the country will have a general election that may impact on Indonesian government bonds, he added.

Performance of the Aviva Investors Emerging Markets Local Currency Bond Fund versus its benchmark and the category average

Source: FE. In US dollars.

Part of the Mark Allen Group.