Unlike many of its South East Asia neighbours, Indonesia’s government bond yields have remained attractive relative to US Treasuries in recent times. Which is just as well, because domestic institutional investors have little alternative than to have most of their money in the bond markets.
“Most people are putting their money in bonds, whether it’s medium terms or longer term bonds,” Antony Dirga, president of Trimegah Asset Management told AsianInvestor.
“When you have high interest rates, you have a high hurdle for equity funds to compete with, rather than playing around in a stock market that is going nowhere. The only way to attract bank deposits into the mutual funds is through bonds,” said Dirga.
Yield is really the only game in town in Jakarta. For the country’s largest pension fund, the $45 billion social security BPJS Ketenagakerjaan, even within their equities allocation, the managers are looking at around a 4% dividend yield on stocks this year.
Their choices are limited though, extending to only 40 to 50 blue chip companies. Anything below that and the managers run into liquidity issues.
“And if we own 5% of each of those 45 companies, that’s only a third of our AUM. That’s why liquidity is such an issue for us,” Abdul Hamid Muchlis, deputy fund manager at BPJS told AsianInvestor.
The fund’s bond exposure, comprising 70% of the fund’s asset allocation, is almost exclusively in government bonds. Government regulation forces BPJS to invest at least 50% in government bonds. The fund's executives are currently lobbying for greater freedom to invest globally.
Indonesia’s corporate bond market is much less liquid than in developed countries.
“If managers can get $20 million liquidity from the market on a daily basis, in corporate bonds, they are doing well,” said Muchlis. “Including the government bond market, perhaps we can get $80 to $100 million dollars on a daily basis to buy or sell.”
According to Asian Development Bank research, corporate bond issuance has been most recently dominated by financing companies, with the largest issuances coming from Sarana Multi Infrastruktur, BFI Finance Indonesia and Pegadaian.
Unlike regional peers, central bank holdings of government bonds in Indonesia are quite substantial, making it the second-largest domestic investor group. Bank Indonesia’s holdings of government bonds significantly rose during the pandemic period as part of measures to support bond market stability.
With the surge in US yields, most Asian government bonds are providing lower yields than their US counterparts despite higher risks, masking foreign investors less motivated to invest in them.
According to Reuters, Asian bonds have suffered massive foreign outflows as a result of the surge in US bond yields and a stronger dollar. Indonesian bonds bore the brunt of the outflows, causing a sharp drop in the rupiah. But, in common with Indian and Philippines bonds, Indonesia’s government bond yield remains comfortably above US rates.
“The good thing is that Indonesia has a very high yield market compared to other countries. We can get 6.5% to 7% for a 10-year bond,” said Muchlis.
“In Malaysia, their 10-year bond yield is 4%, just below the US treasury yield at the moment. The problem they are having is that they must invest overseas to generate a high alpha, but at the moment, we see that liquidity is the main focus.”
Local investors are banking on Indonesia’s economic development continuing once a new president is elected in February 2024. GDP growth is slowing, down from 7% to 5% in recent years.
“But ourselves we see that in 10 years’ time, we could be like Malaysia, where the economy is more stable, inflation is not so volatile and definitely our bond yield will decrease.”
Dirga sees potential for the investment market to expand once private investor numbers grow.
“There is much more once we cross the $5,000 per capita income threshold. Currently the figure is approximately $4,800. Once that happens, maybe the industry could grow three times in the next five to seven years.
“Certainly in the case of US and China, when GDP per capita passed $5,000, there tends to be exponential growth. China did it in the 1990s, the US in 1960. The reason is simple, because there’s a direct correlation with how much you have to save or invest.”