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Danareksa Debt Research Weekly Report,06 August 2019:Fed Rate Cut and Heightened Trade War Tensions
August 06, 2019 17:22 WIB

Fed Rate Cut and Heightened Trade War Tensions

The Fed cuts interest rates
On 31 July 2019 the Central Bank of the United States Federal Reserve cut its benchmark interest rate by 25bps to the range of 2.00% -2.25%. The cut is the first since 2008 and took into account several factors including inflation developments in the US and concerns over the state of the global economy. The Federal Reserve also hinted that it would cut rates further if necessary. Nonetheless, US President Donald Trump said that the decision to reduce interest rates was not aggressive enough. Meanwhile, according to Bloomberg implied probability of the Fed Funds rate, the Fed Funds rate was expected to be cut further in the upcoming Fed meeting. More than 75% of those questioned said that the Fed rate would be cut again on 18 September 2019 by 25 bps to 1.75% -2.00%.

Heightened trade war tensions
Following the Fed’s rate cut and President Trump’s statement, trade war tensions heightened toward the end of last week. On 1 August, 2019, President Trump said he planned to impose a new tariff of 10% on products imported from China worth US$300 billion. The tariffs would take effect on 1 September. Previously, as much as US$250 billion of products made in China were subject to an import fee of 25%. President Trump said China did not move fast enough to resolve the trade war, and he warned that he might raise tariffs on Chinese goods by more than 25% if trade negotiations with Beijing continued to stall. The benchmark 10-year US Treasury yield dropped to its lowest level since 2016 on Thursday after President Donald Trump announced new tariffs on Chinese goods. The benchmark 10-year US Treasury yield fell significantly by 15bps to 1.878%, its lowest level since November 2016. As of 2 August 2019, the 10-year US Treasury yield stood at 1.86%.

“Currency Manipulator” accusations
On Monday, 5 August 2019 relations between the US and China continued to deteriorate. The US government accused China of being a “Currency Manipulator” shortly after the Chinese Central Bank allowed its currency to fall below 7 yuan against the US Dollar. The Chinese government’s strategy is seen as a countermeasure against the threat coming from President Trump’s policies as he will impose a 10% tariff on US$ 300 billion of imported goods from China. This caused the benchmark 10-year US Treasury yield to fall further by 11bps to 1.75%.

Impact on the Indonesian bond market
Indonesian bond yields closed at 7.57% on 2 August 2019, an increase of 5bps compared to the level on 1 August 2019 and an increase of 35bps compared to the previous week’s level on 26 July 2019. Meanwhile, the Rupiah/USD exchange rate weakened by 1.3% to IDR14,185 per USD from IDR14,009 per USD on 26 July 2019.

Indonesia’s CDS has increased again
The level of risk as reflected in Indonesia’s 5-year CDS increased by 11bps from 78 bps on 26 July 2019 to 89bps on 2 August 2019. The increase in Indonesia’s 5-year CDS was also influenced by global uncertainty. This can be seen in the increase of Indonesia’s 5-year CDS by 7bps on 2 August 2019 following President Trump’s statement on tariffs that would be imposed on imported goods from China.

Foreign ownership continues to increase
Foreign investors continued to be net buyers of Indonesian Government bonds. As of 2 August 2019 foreign ownership reached IDR1,019 trillion, an increase of IDR5.98 trillion compared to the previous week’s close. However, the proportion of foreign ownership is only slightly up from 39.27% to 39.33% of the total. In nominal terms, the amount is IDR126 trillion higher than at the end of 2018, when foreign ownership stood at IDR893 trillion.

Realization of Government bond auctions
As of 31 July 2019, from the total amount of required net Government securities issuances in 2019 of IDR388.96 trillion, some Rp264.44 trillion or 67.99% had been realized. And for the total IDR825.70 trillion of gross issuances required in 2019, the Government has issued IDR620.82 trillion or 75.19% of the target. In total, IDR433.54 trillion (69.83%) were conventional securities while IDR187.28 trillion (30.17%) were sukuk.

The Government held its last auction on 30 July 2019 for the SUN series, including SPN03191031, SPN12200410, FR0081, FR0082, FR0080, FR0079, and FR0076. Two new series were auctioned, namely the FR0081 series with a coupon rate of 6.50% which will mature on 15 June 2025 and FR0082 with a coupon rate of 7.00% which will mature on 15 September 2030.

The total incoming bids amounted to IDR43.27 trillion, lower than at the previous SUN auction when total incoming bids reached IDR53.14 trillion. Meanwhile, the total amount of winning bids was IDR21.45 trillion, or lower than at the previous SUN auction of IDR22.05 trillion. The series with the largest amount of incoming bids was the FR0082 series with total incoming bids of IDR19.66 trillion, followed by FR0081 with IDR10.39 trillion. Meanwhile, the most winning bids were for the FR0082 series (IDR11.60 trillion), followed by the FR0081 series (IDR3.54 trillion). Looking ahead, the Government will conduct another auction on 6 August 2019 for the series SPNS07022020, PBS014, PBS019, PBS021, PBS022, and PBS015.

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Danareksa Debt Research Weekly Report, 23 Jul 2019 : Dovish Direction
July 23, 2019 17:28 WIB

Dovish Direction

Safe havens remain attractive
Given the global economic uncertainty, demand for safe haven instruments such as US Treasuries has continued to increase. This has led to a downtrend in US Treasury yields. As of 15 July 2019, the 10-year US Treasury yield stood at 2.05%, or down by 64bps since the end of last year. At the same time, the difference between the US Treasury 10-year yield and the Fed Rate is negative 45bps.

Will the Fed reduce interest rates this July?
Currently, market players are still awaiting the Fed’s decision at the end of July 2019 on whether it will be in line with market expectations that the Fed will cut its benchmark interest rate given that Powell stated in his last statement that uncertainty was increasing. Based on Bloomberg calculations for the Fed Rate implied probability (ticker: WIRP) as of 22 July 2019, market participants expect that the Fed will reduce its benchmark interest rate by 25bps (74.5%), and possibly even by as much as 50bps (25.5%).

Bank Indonesia cut its benchmark interest rate
At the Bank Indonesia Board of Governors (RDG) meeting on 17-18 July 2019, the decision was made to reduce the 7-day BI Repo Rate (BI7DRRR) by 25bps from 6.00% to 5.75%. The decision was taken in consideration of the forecast for low inflation and the need to push economic growth momentum. Going forward, Bank Indonesia views that there is still room for accommodative monetary policy in line with the low inflation forecast and the need to push economic growth.

This decision was taken against a backdrop of persisting trade tensions which have slowed global economic growth, with Indonesia’s economic growth in the second quarter of 2019 estimated to be about the same as in the previous quarter. Meanwhile, the performance of Indonesia’s balance of payments in the second quarter was still maintained and a stronger rupiah exchange rate supported Indonesia’s external stability. In addition, inflation in June 2019 was maintained at a low and stable level, along with financial stability and sufficient liquidity as well as improved credit risk.

Strengthening of the Rupiah/US Dollar exchange rate
The Rupiah has strengthened relative to the US Dollar. As of 19 July 2019, the Rupiah/US Dollar exchange rate stood at IDR13,938 per USD or appreciating by 1.33% compared to the end of June 2019. Compared to the end of 2018, the Rupiah has appreciated by 4.32% from IDR14,568 per USD.

Attractive Indonesian bond yield
Meanwhile, the Indonesian bond market has shown good performance. Based on Bloomberg BTMM ID data as of 19 July 2019, 10-year Government bond yields stand at 7.15% or down 88bps compared to the end of 2018. IBPA notes that this downtrend in Indonesian bond yields pushed the total return on Government bonds to a solid figure of 10.36% from to the end of 2018.

Continuing the CDS downtrend
The bullish trend in Indonesian bond yields was also driven by an increase in Indonesia’s credit rating by S & P from BBB- to BBB at the end of May 2019. Compared to the end of May 2019, the level of risk as reflected in Indonesia’s 5-year CDS fell 30bps from 115bps to 85bps. The decline in Indonesia’s 5-year CDS is in line with the CDS average of countries that are ranked BBB.

Foreign ownership continues to increase
Foreign investors continued to be net buyers of Indonesian Government bonds. As of July 18, 2019 foreign ownership reached Rp1,011 trillion or 39.30% of the total. This nominal amount is higher by IDR118 trillion compared to the end of 2018, when the figure was IDR893 trillion.

Government bond issuances reached the target
The gross realization of Government bond issuances during the first semester reached IDR558.10 trillion, or 67.59% of the total requirement of gross issuances in 2019 of IDR825.7 trillion. This achievement exceeds the target in the first semester of 50% - 60%. The target of the Government auction in the second quarter was also achieved. With a target of IDR129 trillion, the realization of Government bonds and sukuk issuances in the second quarter was recorded at Rp132.96 trillion. During the third quarter, there were 7 bond auctions and 6 sukuk auctions with targeted issuances of IDR185 trillion. As of 22 July 2019, the Government conducted 2 SUN auctions and 1 SBSN auction with total funds raised amounting to IDR 52.2 trillion.

Government bond auctions
The government conducted its last auction on 16 July 2019 for the SUN series, including SPN03191017, SPN12200410, FR0077, FR0078, FR0080, FR0079, and FR0076. The total incoming bids were IDR53.14 trillion, while the total winning bids reached IDR22.05 trillion. The largest amount of bids were for series FR0078 with total incoming bids of IDR17 trillion, followed by FR0080 of IDR8.89 trillion. Meanwhile, the series with the most winning bids was FR0078 with IDR5.50 trillion, followed by FR0080 with IDR4.80 trillion. The next auction is on 23 July 2019 for the SPNS10012020, PBS014, PBS019, PBS021, PBS022, and PBS015 series.

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Danareksa Debt Research Weekly Report, 11 Jul 2019 : Timing the Next Move
July 11, 2019 15:00 WIB

Timing the Next Move

Fluctuation of the trade war
The trade war between the US and China escalated during the second quarter. Due to sluggish trade negotiations, Trump made the decision to challenge China through his Twitter account on 6 May 2019. Then on 10 May 2019, the US Government officially increased tariffs on US$200 billion of imports of Chinese goods from 10% to 25%. 3 days later, the Chinese Government retaliated by raising the tariffs on the imports of US$ 60 billion of goods. At the G20 Summit held in late June in Japan, Trump and Xi Jinping finally met and the two leaders agreed that negotiations between the two sides should continue.

The trade tensions have led to greater global economic uncertainty, such that demand for safe-haven instruments (US treasuries) has increased. This is evident from the significant downward trend in US treasury yields. As of the end of June 2019, the 10-year US treasury yield was 2.00%, or down 69bps compared to its level at the end of last year. In addition, the difference between the 10-year US treasury and the Fed Rate dropped from 19bps to negative 50bps. Based on historical data, a negative spread between the two interest rates is an early indicator of an incoming recession.

More dovish tone from the Fed
In the second quarter of 2019, the Federal Reserve (Fed) held 2 FOMC meetings on 30 April and 18 June. Although the Fed chose to keep interest rates in the range of 2.25% - 2.50%, it also signalled that cuts in interest rates in the future were more likely. At the press release of the FOMC meeting on 30 April, the Fed pointed toward continued expansion of the economy, a strong labour market and benign inflation which is in-line with the target of 2%. At the FOMC meeting on 18 June, however, the Fed said that the outlook was more uncertain, such that the “patient” tone highlighted at the FOMC meeting on 30 April was missing. In turn, this raised market expectations that the Fed would cut interest rates at the FOMC meeting at the end of July as reflected in the Bloomberg calculation for the Fed Rate implied probability (ticker: WIRP) as of 1 July 2019, showing that the chance of a cut in the Fed rate in July was 100%.

Of particular interest is the direction of Fed policy as reflected in the historical Fed Funds Rate (FFR) data for the past 18 years. The data shows that the Fed has never made adjustments to FFR interest rates (either raising or reducing them) in July in the past 18 years. Rather, the Fed made more adjustments to interest rates in December (50.00%), June (36.84%), March (31.58%), and September (27.78%)

When will Bank Indonesia cut its reference rate?
Some central banks have adopted loose monetary policies related to expectations of a global economic slowdown and more dovish Fed policymaking. On 7 May 2019, Bank Negara Malaysia lowered its benchmark interest rate for the first time in the past 3 years by 25bps to 3%. Meanwhile, in early June, the Reserve Bank of Australia (RBA) also cut interest rates by 25bps to 1.25%, its lowest-ever level. Meanwhile, the Reserve Bank of India (RBI) lowered its benchmark interest rate for the third time this year from 6% to 5.75% and changed its monetary policy stance from “neutral” to “accommodative”.

Unlike these countries, however, Bank Indonesia (BI), which held a Board of Governors’ Meeting (RDG) on 19-20 June 2019, decided to keep its BI7DRR benchmark rate at 6%. However, BI has signalled that it is considering reducing policy interest rates due to the low inflation rate and in a bid to maintain Indonesia’s economic growth. Meanwhile, to increase the availability of banking liquidity, BI reduced the Rupiah Statutory Reserves (GWM) for Conventional Commercial Banks and Islamic Commercial Banks / Sharia Business Units by 50bps to 6% and 4.5% respectively.

Widening current account deficit
Indonesia’s Balance of Payments (NPI) recorded a surplus of $2.4 billion during the first quarter of 2019, better than in the same period in 2018 when the deficit was $3.8 billion. Nevertheless, the Current Account Deficit (CAD) has grown in 2019 compared to 2018. During the first quarter of 2019, the CAD was recorded at $6.96 billion, or around 2.6% of the Gross Domestic Product (GDP). This figure is higher than the deficit in the first quarter of 2018 of $5.19 billion (2.01% of GDP). In other words, the improvement in the balance of payments during the first quarter of 2019 reflects an increase in the financial account surplus from $2.2 billion during 1Q18 to $10 billion in 1Q19.

In May 2019, the trade balance posted a surplus of $0.21 billion, or far better than in April when a deficit of $2.28 billion was recorded. This reflects an increase in exports of 12.4% from $13.1 billion to $14.7 billion. Imports, by comparison, dropped from $15.4 billion to $14.5 billion, down 5.6%. Thus, in 5M19, Indonesia’s trade balance recorded a deficit of $2.14 billion or an improvement from the $2.86 billion deficit recorded in the same period of 2018.

Meanwhile, during the second quarter of 2019, the Rupiah tended to appreciate against the US Dollar. Since the end of December 2018, the Rupiah strengthened 1.83% to IDR14,126 per US Dollar or up 0.82% compared to the end of the first quarter of 2019. On the other hand, the DXY index weakened 1.11% compared to the end of March 2019 to 96 points.

Bond Market Overview

Credit rating upgrade has created an opportunity
At the end of May 2019, international ratings agency Standard and Poor’s (S & P) increased Indonesia’s credit rating from BBB- (stable outlook) to BBB (stable outlook). The prospect of strong economic growth and prudent fiscal policy are the main reasons why S & P increased its rating to investment grade following Moody’s and Fitch. This move will reduce the required yield from investors and raise Indonesia’s attractiveness as an investment destination due to lower perceived risks. As such, Indonesia’s 5-year credit default swap (CDS), one of the indicators used to measure the level of risk, fell significantly during June. As of the end of June 2019, Indonesia’s 5-year CDS was recorded at 90bps, or down by 25bps from its position at the end of May 2019 of 115bps.

Could the Indonesia CDS be lower?
The potential for a decline in Indonesia’s CDS due to a higher rating from S & P can be predicted from the difference in the average CDS from the group of countries with a minimum rating of BBB- (without Italy) and BBB (without Indonesia). Based on Bloomberg data as of the end of June 2019, the CDS average for the BBB group was 55bps, or 31bps lower than the CDS average for the BBB- group (86bps). In addition, Indonesia’s position as the country that has the highest CDS in the BBB group signals greater potential for a reduction in its CDS. As of the end of June, Indonesia’s 5-year CDS was 92bps or 37bps higher than the CDS average for the BBB group.

Foreign investors: The end of the wait-and-see stance
The escalation of trade wars and the country’s general elections in April encouraged foreign investors to maintain their holdings in the Indonesian bond market. In the first quarter of 2019 foreign investors increased their holdings by IDR73.87 trillion to IDR967.12 trillion (38.26% of the total outstanding) at the end of March 2019. Then during April and May, foreign holdings declined by IDR17.56 trillion to IDR949.56 trillion as of May. However, in terms of the proportion to the total outstanding, foreign ownership only decreased by 0.37% from 38.26% to 37.88% in the same period.

In June 2019, foreign holdings in the Indonesian bond market increased significantly. This reflects the lower political uncertainty following the general elections in the country and the increase in Indonesia’s ranking by S&P. Foreign ownership grew by IDR39.19 trillion during June 2019 to IDR988.75 trillion, or 39.06% of the total outstanding. This is the highest proportion since April 2018. There was net buying by foreign investors of IDR95.50 trillion during the first semester of 2019, or more than in the same period in 2018 when foreign outflows reached IDR5.98 trillion.

Government bond issuances: well managed
Government bond issuances in the first semester reached IDR558.10 trillion, or 67.59% of the total requirement for 2019’s gross issuances of IDR825.7 trillion. This figure is higher than the target for the first semester (50%-60%). Of the total issuances, IDR118.93 trillion is of foreign currency bonds, or 21.31% of the total gross issuances. By comparison, the gross issuances of Rupiah-denominated bonds consisted of IDR297.41 trillion of conventional bonds (53.29%) and IDR141.76 trillion of Sukuk (25.40%). In addition, retail bonds and retail sukuk have also played an important role in the issuance of bonds in 2019. The issuance of Government retail instruments in 1H19 was recorded at IDR33.14 trillion, or 5.94% of the total gross issuances (the initial target for the full year is IDR60 - IDR80 trillion).

The target for the Government auction in the second quarter was achieved. With a target of IDR129 trillion, Government bond and sukuk issuances in the second quarter were recorded at IDR132.96 trillion. The total incoming bids during the second quarter were less than in the first quarter as were the accepted bids. This implies a lower bid-to-cover ratio for the second quarter. In the third quarter, there are 7 bond auctions and 6 sukuk auctions with an issuance target of IDR185 trillion.

Government bonds secondary market
The total volume per transaction for Indonesian bonds during the second quarter of 2019 was lower at IDR17.51 billion compared to IDR23.42 billion in 1Q19 and IDR19.69 billion in 2Q18. Meanwhile, the total transaction volume for 1H19 was IDR1,999 trillion, slightly lower than in the same period the previous year IDR2,155 trillion.

Corporate bond issuances
During the first semester of 2019, corporate bond issuances were slightly lower at IDR54.96 trillion compared to issuances in the same period of the previous year which reached Rp56.44 trillion. In 2Q19, corporate bond issuances reached IDR33.67 trillion, or higher than in 2Q18 when they reached IDR 27.43 trillion. The financial institution sector was still the largest issuer in 2Q19 (IDR13.17 trillion), followed by banking (IDR10.79 trillion). Based on the instrument rating, AAA rated instruments still dominated with a total value of IDR12.89 trillion.

Corporate bonds secondary market
The total volume per transaction of corporate bond during the second quarter of 2019 was higher than in the first quarter of 2019, but smaller than in the same quarter the previous year. In 2Q19, volume was recorded at IDR9.43 billion per transaction while the figures for 1Q19 and 2Q18 were IDR8.73 billion per transaction and IDR10.53 billion per transaction, respectively. The transaction volume in 1H19 reached IDR131.656 trillion with 14,500 transactions, or more than 13,188 transactions in 1H18 with total transaction volume of IDR120,518 trillion.

By issuer, ADMF bonds dominated the transaction volume in the second quarter of 2019, reaching IDR6.19 trillion, or accounting for 9.02% of the total transactions volume. In second and third positions were BEXI and SMFP with transactions volume of IDR5.68 trillion and IDR3.77 trillion, respectively.

More optimistic forecast
The escalation of the US-China trade war, slowdown in the global economy, and the shift in the direction of the Fed’s policies led to changes in several indicators that influenced the yields on Indonesian bonds. Interest rate cuts in several countries and room for the Fed to reduce interest rates have also had a significant effect. Projections for the 10-year US Treasury yield have fallen significantly compared to the previous quarter from 2.2-2.8% to 1.95-2.35%. With investors attracted toward safe-haven instruments, projected foreign ownership in Indonesian government bonds is estimated to stand at 38% -39%, or lower than the previous projection of 39% -40%. Meanwhile, several other factors such as room for Bank Indonesia to cut the benchmark interest rate and the increase in Indonesia’s S & P rating in May which impacted Indonesia’s 5-year CDS, then Danareksa’s projected Government Rupiah bonds yield (BTMM ID 10- year) is more optimistic (in the range of 7.13% -7.66%).

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Weekly Report Oct 2017
Country's FCLT Rating
S & P BBB-
Moody's Baa3
Fitch BBB-

Key Market Editor
BI Rate 4.25%
JCI 5,915.00
IDR 13.52
Inflation Sep 2017(%YoY) 3.72%

Market Outstanding
Government Bond IDR 2,060.70 bn
Corporate Bond IDR 371.60 bn

Last Week Trading Volume
Government Bond IDR 73.32 bn
Corporate Bond IDR 4.85 bn

Government Bond Indices
Price Index 134.87
Yield Index 6.23%
Total Return 557.70

Benchmark Yield
FR0061 5 Year 6.19%
FR0059 10 Year 6.53%
FR0074 15 Year 7.13%
FR0072 20 Year 7.32%