1

Recent Condition of Market

The year 2015 was a bit rollercoaster for the bond market as concern on Feds rate hike loomed. As
consequences, yield of Indonesias local currency bond maturing within the next 10 years jumped to
over 9.5% in September 2015, while the local currency itself, Rupiah, weakened above IDR 14,000
per USD and nearly touched IDR 15,000 per USD. However, we see 2016 as a better year for
Indonesia bond market.
7
6
5

4
3
2
1
0
-1

spread BI rate-CPI (RHS) (%)

Sep-15

Jan-15

FR 10-yr (%)

Mei-15

Sep-14

Mei-14

Jan-14

Sep-13

Mei-13

Jan-13

Sep-12

Mei-12

Jan-12

Sep-11

Jan-11

Mei-11

Sep-10

Mei-10

-2

Jan-10

Source: Bloomberg

12
11
10
9
8
7
6
5
4
3
2

CPI (%)

As can be seen from the graph,

the 10-yr yield is now hovering
around 8.5%.
Year-on-year
inflation rate at the end of 2015
was quite benign (3.4%) due to
base-effect sourced from fuel
price hike policy in late 2014.
Although Bank Indonesia has
started to become more dovish
by decreasing BI rate by 0.25%,
we believe there will be
another 0.25% rate decrease in
second quarter of 2016.

What are the Upside Potentials?

First of all, the cost of energy which has been tanking since 2014 helps Indonesia to reduce the cost
of logistics which we hope it can lower prices in near future. Thus, we see 2016 as a slow-inflation
year as long as government can push distribution chains to be more effective and efficient. At least,
Government has wider fiscal room to reduce subsidies and minimise the probability of fuel price hike
in the future which is very sensitive to nations inflation figure to soar.
600

20
18

Source: Bloomberg

500

16
14

400

12
300

10
8

200

6
4

100

Foreign Ownership (IDR trn) (LHS)

rizqiawan.ecostat@gmail.com | +62 821-13144-190

FR 10-yr (%)

Des-15

Jul-15

Feb-15

Sep-14

Apr-14

Nop-13

Jun-13

Jan-13

Agust-12

Mar-12

Okt-11

Mei-11

Des-10

Jul-10

Feb-10

Sep-09

Apr-09

Nop-08

Jan-08

Jun-08

On the other side, Government

has announced several economic
policy packages that might be run
effectively this year. One of the
main aims of the packages is
infrastructure improvement to
reduce the cost of economy
which is expected to contain
inflation at low level concurrently
with lower energy price.
We also have found and
statistically tested the fact that
foreign investors are usually
attracted to enter the market
when 10-yr bond yield is in the
range of 7.5%-10% (see graph on
the left).

What are the Downside Risks?

Nevertheless, there are downside risks that should be understood by investors which mainly come
from two sources, slowing growth in China and decreasing oil price.
4000

14,000

3000

12,000

2000
1000

8,000
0

6,000
-1000

4,000

Trade Balance

Jul-15

Jan-15

Jul-14

Jul-13

Jan-14

Jul-12

Jan-13

Jan-12

Jul-11

Jan-11

Jul-10

-3000
Jul-09

0
Jan-10

-2000

Jul-08

2,000

IDR currency (LHS)

Macro Consensus
Market consensus shown by the table below explains that Indonesia will grow for around 5.2% y-o-y,
which is still very good. Inflation figure is predicted to be around 5%, leaving 2.25% spread with
current BI rate. Market predicts that there will be another rate cut in second semester of 2016, while
we expect it will happen in second quarter of 2016.
Indicator
Economic Activity
Real GDP (YoY%)
CPI (YoY%)
Unemployment (%)
External Balance
Curr. Acct. (% of GDP)
Fiscal Balance
Budget (% of GDP)
Interest Rates
Central Bank Rate (%)
3-Month Rate (%)
2-Year Note (%)
10-Year Note (%)
Exchange Rates
USDIDR

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

7.70
10.30
8.40

4.70
4.90
8.00

6.40
5.10
7.30

6.20
5.40

6.00
4.00

5.60
6.40

5.00
6.40
5.90

4.70
6.40
6.00

5.20
5.00
6.00

5.50
5.00
5.80

0.00

1.80

0.70

0.20

-2.70

-3.30

-3.10

-2.10

-2.30

-2.40

-1.20

-0.90

-2.10

-2.00

-1.50

-2.50

-2.10

-2.40

-2.30

-2.20

9.25
12.13
11.42
11.89

6.50
7.06
7.66
10.06

6.50
6.64
5.87
7.61

6.00
5.27
5.16
6.03

5.75
5.02
4.48
5.19

7.50
7.84
7.64
8.45

7.75
7.17
7.49
7.80

7.50
8.86
8.61
8.74

7.10
7.89

11,120

9,404

8,996

9,069

9,793

12,171

12,388

13,788

8.47
14,600

14,490

Yield of 10-yr benchmark is

expected to move lower in
2016 to 8.47%. However we
predict that 10-yr benchmark
will be within the range of
7.75%-8.25% at the mid of
2016.
We are quite dovish this year
because Bank Indonesia
should anticipate the slowing
growth in the region by giving
room for the economy to
grow.

The gross issuance of government bonds in 2016 will be slightly lower (6% lower from last years
figure). Hence, we do not see oversupply of government bonds although government is boosting
infrastructure projects this year. In conclusion, we believe this is the right time to collect bonds while
keeping an eye of deterioration happening in China.

EcoStat | rizqiawan.ecostat@gmail.com | +62 821-13144-190

Source: Bloomberg

10,000

Jan-09

China economic growth, which is

expected to slow further to 6.5% at the
end of 2016, will put pressure on
Indonesias trade balance. Deficit on
trade balance could emerge as a reason
for a weaker rupiah. Thus, funding could
be more expensive for foreigners to enter
Indonesia capital market.

16,000

Jan-08

China economic growth has been slowing

in the last 5 years and this has sparked
outflow in emerging markets of which
economies tied up to China. Indonesia
has 13% export exposure to China.
Oppositely, China dominates Indonesia
imported goods for 17% of total
imported goods.