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Weekly Update
Danareksa Weekly Report 2018, 13 Maret 2018 : Pressure from Global Market
March 13, 2018 11:31

Negative performance of IDR Government bonds
After recording a total return of 1.25% in January 2018, the Danareksa Government Bonds Total Return Index recorded a loss of 1.66% in February 2018. The yield on the 10-year Government Bonds benchmark (FR0064) increased by 35bps to 6.59% by the end of last month. This increase in the yield in the Indonesian bonds market was partly driven by the volatility in US Treasuries. At the end of February 2018, the US Treasury yield ended the month at 2.87%, or 47bps higher than its level at the end of 2017.

The impact of USD/IDR volatility
On the domestic front, the weakening of the IDR relative to the USD and the high volatility led to weaker demand from foreign investors. As of 28 February 2018, the USD/IDR exchange rate stood at IDR13,751/USD, or depreciating by 1.45% so far in 2018. The volatility depicted by Average True Range has shown an increasing trend since the end of January 2018.

Foreign holdings of Government bonds, which can be a measurement of demand from foreign investors, have declined significantly since the end of January. After reaching their highest level as of January 23, 2018, at IDR880 trillion (41.1%), they fell significantly by IDR43 trillion to IDR837 trillion (39.1%) as of 5 March 2018. Earlier, foreign holdings of Government bonds stood at IDR836 trillion (39.8%) at the end of 2017. In other words, in the year up until the beginning of March, foreign investors did not add to their bond holdings. This is unlike the situation in 2016 and 2017 when foreign investors increased their holdings by IDR31.7 trillion and IDR27.4 trillion respectively.

Condition of the primary & secondary Indonesian bonds market
Government bonds issuances – net realized as of February 2018 - reached IDR121.1 trillion or 29.2% of the issuance target of IDR414.5 trillion. By comparison, corporate bonds issuance in 2M18 on the IDX reached IDR19 trillion, higher than in the same period last year (IDR10.4 trillion).

A significant decline in Government bonds activity was seen in February. Total Government bonds trading during the month reached IDR392.8 trillion, down by 23% from January’s IDR508.8 trillion. For corporate bonds, there was little change, as trading declined from IDR17.4 trillion in January to IDR16.7 trillion in February.

The world’s first Green Sukuk issued by the Government
In February 2018, the Government of the Republic of Indonesia issued USD3 billion of Sukuk Wakalah. The 5-year Sukuk Wakalah have a coupon of 3.75% with a total size of USD1.25 billion while the 10-year Sukuk have a coupon of 4.40% and a total size of USD 1.75 billion. The 5-year Sukuk Wakalah can be categorized as Green Sukuk, as the proceeds are for Agriculture Infrastructure. For each series, the ratings given are Baa3 by Moody’s Investors Service, BBB- by S&P Global Ratings and BBB by Fitch Ratings.

2018 forecast update
Indonesia is still recording good economic growth. GDP growth reached 5.19% in the 4th quarter of 2017 compared to the same period last year. Meanwhile, the inflation rate is still manageable at 3.00%-3.50%. However, the global market conditions are likely to remain volatile as a result of significant increases in US Treasury yields in 2M18. The US tax rate cut caused the global market to anticipate a widening budget deficit and larger supply of US Treasuries to cover the deficit. The expectation of higher supply lifted the 10-year US Treasury yield from 2.40% at the end of 2017 to 2.80%-2.90% at the beginning of March 2018. Beside supply, improving macroeconomic conditions have also raised expectations of higher inflation and of higher US Treasury yields in 2M18. The rising yields and prospects of faster Fed rate hikes may impact the appetite of foreigners for IDR Tradable SBN and also put pressure on the IDR relative to the USD.
As a safe haven, the increase in US Treasury yields has also impacted on Indonesian Government bond (SUN) yields and the increasing volatility of the USD/IDR exchange rate. Although domestic macroeconomic conditions are still good and inflation will remain manageable, with the high volatility of the USD/IDR this will likely be a consideration for Bank Indonesia when it determines the reference rate (BI 7DRR). Indeed, the likelihood of reference rate cuts is limited. As such, in our base scenario we expect the BI 7DRR to be kept unchanged at 4.25%. The other assumptions of our base scenario by the end of the year are: USD/IDR exchange rate of IDR13,500/USD; Indonesia 5-year CDS of 80bps; foreign ownership 41%; and US Treasury yield of 2.90%-3.00%. With these assumptions, our forecast for the 10-year Government bonds yield benchmark is between 6.65%-6.75%.