Indonesia’s Bonds Hit Hardest in Asia Amid State Debt Risks

(Bloomberg) -- Indonesian state-run power utility’s dollar bonds have suffered the most in Asia over the past two weeks due to rising concerns about the nation’s debt. This has pressured local borrowers, who face $6 billion in maturities through the end of 2025.

Six of the 10 biggest decliners in the Asia ex-Japan dollar bond market in that period were notes from PT Perusahaan Listrik Negara, according to prices compiled by Bloomberg. Yield premiums on some notes of other state firms PT Pertamina and PT Hutama Karya also rose to a three-month high.

The average spreads of corporate and quasi-sovereign notes have widened six basis points in June, the most in five months, as Bloomberg News reported that President-elect Prabowo Subianto plans to raise the country’s debt ratio to fund his spending promises. On Friday, the rupiah hit a new four-year low, making it costlier for local companies to service their dollar debts. 

“The tightness in credit spreads in general right now give little room for any rate volatility or adverse change in risk perception, while the weakness in rupiah is certainly bad for future external debt repayments,” said Ting Meng, senior Asia credit strategist at Australia & New Zealand Banking Group Ltd.

On Monday, a member of Prabowo’s economic transition team said the next leader remains committed to fiscal prudence after the outgoing administration agreed to allocate more than $4 billion for his free meal program for school children.

“We want to emphasize that the President-elect is committed to the deficit target that will be agreed upon by the current government and the parliament,” Thomas Djiwandono said. The expenditure won’t breach the mandatory 3% budget deficit cap, Finance Minister Sri Mulyani Indrawati said separately on Monday.

Spreads of Listrik Negara’s dollar notes due in June 2050, May 2048 and July 2049 jumped to a three-month high last week. The yield premium on US currency bond from Pertamina due in February 2060 reached its highest since March.

These quasi-sovereign notes carry the highest rating among the nation’s bonds due to their ties to the government’s sovereign ratings. The widening spreads mean lower-rated issuers would have to offer even higher yield premiums on new bonds. 

This will likely raise refinancing costs for the nation’s corporate debt, with over $6 billion of US currency notes set to become due through to the end of 2025, more than peers in Malaysia, Thailand and the Philippines.

“The wider credit spreads were caused by the renewed concerns about fiscal policy, which has affected the broad sentiment on Indonesian risk assets,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore.

(Adds comments from Prabowo’s team in fifth paragraph)

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