Indonesian bonds suffer amid political and economic worries

15 August 2014   Category: News, Asia, Global, Indonesia   By Derek Au

Indonesian bonds have seen a recent sharp fall after the Southeast Asian country’s incoming president faced a legal challenge by his main rival and data showed risk of an economic slowdown.

The yield of five-year Indonesian government bonds almost reached 8% on August 13, up 18 basis points since August 4, according to data from the Indonesia Bond Pricing Agency, implying prices went down due to their inverse correlation. The yield of a bond is inverse to its price: as bond prices increase, bond yields fall and vice versa.

Commenting on the recent sell-off of Indonesian bonds, Anthony Gillham, portfolio manager at Old Mutual Global Investors, tells Asia Asset Management that he believes both local currency emerging market debt and Indonesian government bonds offer good value currently, as well as providing a margin of safety over other fixed income assets, following falls in 2013.

“Indonesia faced the additional challenge this year of a general election which meant the bond market offered an additional premium for political risk and had held back the currency which, all told, we felt lent good asymmetry to the trade. We further increased the position after the market’s favoured candidate Joko Widodo won, thus removing this element of political risk,” says Mr. Gillham.

There are also signs the Indonesian economy is losing momentum, putting pressure on president-elect Joko Widodo – set to take office in October – to promptly implement his reform agenda. Indonesia’s economy expanded 5.12% in the second quarter from a year earlier, the slowest in five years, compared with growth of 5.22% in the first quarter.

Another concern came from the performance of its trade balance, which posted a US$305 million deficit in June, compared with a surplus of $53 million in May.

Besides economic slowdown, the nation also faces political uncertainty as presidential candidate Prabowo Subianto has initiated a court challenge to Mr. Widodo’s victory. Mr. Subianto has waged a last-ditch effort to overturn the result, as he claimed the election commission failed to investigate all allegations of cheating.