Satria Sambijantoro and Ananka

Key points:

  • Finance Ministry sold IDR23.2tn in bond auction, higher than IDR15tn target
  • Govt may need funds for high disbursement of general allocation funds (DAU) and social assistance funds (Bansos) in Q1

The Finance Ministry’s Directorate-General for Debt and Risk Management (DJPPR) sold IDR23.2tn from a government bond auction on Tuesday, higher than its indicative target of IDR15tn. Though it was lower than IDR 27.75tn raised during the last conventional bond auction on Jan. 15, the absorption was still aggressive by past government’s standards in the primary bond market.

We view this as a signal that the government’s frontloading strategy would still be in full throttle, despite recent concerns over oversupply and crowding-out effects in the secondary bond market. Latest auction effectively means that the government has absorbed IDR154tn of funds as of January this year (January 2018: IDR126.8tn). This accounts for 18.65% of annual gross bond issuance target of IDR825.7tn for FY19. Historically, the government always raised around 35% of total annual issuance in the first three months of the year.

The DJPPR’s aggressive fund absorption in the debt auctions could be related to higher state spending needs ahead. In 1Q19, the Finance Ministry has been instructed to accelerate the disbursement of: 1) general allocation funds (DAU) that include regional transfers and village grants, and 2) social assistance funds (bansos) that include transfers of cash and basic staples for the poor households. On the other hand, tax revenue collection is historically sluggish in the beginning of the year.

As expected, bond prices saw a correction after the aggressive sales on today’s auction. The yield for Indonesia’s 10-year notes now stood at 8.16%, having already increased by 13.3 bps in January. Despite concerns of oversupply and heavy investor positioning in the primary bond market, we view the 8.16% yield offered by the 10-year IDR bonds as still quite cheap relative to Indonesia’s domestic fundamentals.

Most importantly, the current weak USD environment could still make way for the IDR to strengthen further (Bahana’s IDR forecast: 13,800 per dollar in 1H19). The IDR appreciation consequently should supporting the IDR bond market outlook. We thus reaffirm our view that the yield for 10-year bonds might still have further room to rally to 7.60% in 1H19.

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