Financial Markets Indonesia: ORI Bonds & Rupiah Performance in 2014

The total volume order for ORI011 reached IDR 21.3 trillion with individual offers ranging from IDR 100 million to IDR 500 million according to information from the Finance Ministry.

ORI issuances are always warmly welcomed by individual investors. This year the ORI011 serie had a coupon rate (8.50 percent) that is higher than Bank Indonesia’s key interest rate (BI rate) which is currently set at 7.50 percent. However, ORI011 had a lower rate than the average 12-month time deposits among commercial lenders in Indonesia (8.74 percent in August 2014). But, on the other hand, ORI bonds bear only 15 percent tax, while tax for deposit interest is 20 percent.

Proceeds from the ORI011 issuance will be used to finance Indonesia’s 2014 budget deficit. This deficit may reach IDR 242 trillion, or 2.4 percent of the country’s gross domestic product (GDP). 

Indonesian ORI Bond Series:

ORI	Year	Coupon (%)	Maturity Date	Investment (in trillions)	Number of    Investors	New   Investors
001	2006	12,05	08-08-2009	IDR 3.28	16,561	16,561
002	2007	9,28	28-03-2010	IDR 6.233	13,158	10,372
003	2007	9,40	12-09-2011	IDR 9.367	22,837	16,692
004	2008	9.50	12-03-2012	IDR 13.455	37,724	26,089
005	2008	11,45	15-09-2013	IDR 2.71	14,001	10,983
006	2009	9,35	15-08-2012	IDR 8.54	24,433	14,601
007	2010	7,95	15-08-2013	IDR 8.0	17,705	10,959
008	2011	7,30	15-10-2014	IDR 11.0	15,372	10,410
009	2012	6,25	15-10-2015	IDR 12.68	25,293	16,107
010	2013	8,50	15-10-2016	IDR 20.2	38,860	26,824
011	2014	8,50	15-10-2017	IDR 21.2	+35,000	-

Indonesian Rupiah Exchange Rate

Although the Indonesian rupiah has appreciated sharply in the past couple of days - primarily on the inauguration of Joko Widodo (who is eager to curb state spending on energy subsidies) as Indonesia’s seventh President as well as on the weakening US dollar amid speculation that the US Federal Reserve will continue stimulus programs as economic recovery in the USA is still sluggish -

Morgan Stanley expects that the rupiah will extend its three-month slide. According to Morgan Stanley, an American multinational financial services firm, the main problem lies in the hostile parliament. The Merah-Putih coalition, involving six political parties that combined secured a majority in Indonesian parliament, may be able to block Widodo’s reform programs. This coalition is led by defeated presidential candidate Prabowo Subianto. In the past month, the coalition managed to show its strength as it was able to pass a new law that abolishes direct elections in the regions, and managed to elect speakers in parliament (DPR) and the People's Consultative Assembly (MPR) from its own ranks. Meanwhile, the coalition of political parties that support Widodo constitutes only 37 percent of parliament.

Morgan Stanley downgraded its 2014 year-end projection for the rupiah to IDR 12,600 per US dollar (from IDR 11,500 per US dollar previously). Apart from the aforementioned political concerns, the US-based bank also believes that Indonesia is more vulnerable to capital outflows ahead of looming higher US interest rates due to relatively low foreign exchange reserves (compared to its neighbouring countries) and its wide current account deficit. In the second quarter of 2014, the country’s current account deficit reached USD $9.1 billion, or 4.27 percent of GDP.

Indonesia needs capital inflows to curb the current account deficit but doubt has emerged whether the current political and economic context is able to convince global investors to invest in the country. Foreign funds have already pulled USD $1.1 billion from local shares since the end of August 2014 according to information from Bloomberg.

In the past three months, the rupiah has been the worst-performing emerging Asian currency against the US dollar.

| Source: Bank Indonesia

Ahead of higher US interest rates (expected in mid-2015) Indonesia is particularly vulnerable to capital outflows because there is a large foreign presence in the country’s financial markets. Foreigners hold 37 percent of Indonesian securities. In times of global shocks, when global investors pull funds out from riskier assets, Indonesia will thus be hit harder than its neighbouring countries where foreign presence in financial markets is smaller.

International financial institutions are also concerned about limited improvement of Indonesia’s current account deficit. Despite having raised subsidized fuel prices in June 2013 and raising the country’s key interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.50 percent in November 2014, the wide current account deficit has not shown a marked improvement. In fact, it has stayed at the same level. Therefore, Widodo’s plan to raise subsidized fuel prices again before the year-end is well received by international institutions and investors. Speculation emerged that Widodo will raise these prices (gasoline and diesel) by about 50 percent in November. For this move he does not require approval from parliament. Curbing state sponsored energy subsidies would free-up funds for much needed economic and social development, including infrastructure, education and healthcare.

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