Sat, 24 Oct 2009
From:
By David Yong and Lilian Karunungan
Oct. 23 (Bloomberg) -- Pacific Investment Management Co., which oversees $842 billion globally, said there is a “good chance” Indonesia will regain its investment grade debt rating in three to five years. Standard & Poor’s today raised the nation’s outlook to positive.

Indonesia, India and China have “navigated the global crisis relatively unscathed as domestic demand, underpinned by large populations, effectively provided a cushion,” Chia-Liang Lian, a Singapore-based fund manager at Pimco, which runs the world’s largest bond fund, wrote in a report released today.

Indonesia lost its investment-grade ratings from Moody’s Investors Service and S&P’s in December 1997 after a regional financial crisis that forced the government to seek a $23 billion bailout from the International Monetary Fund. Moody’s on Sept. 16 raised the nation’s ratings to the highest level in 11 years, citing resilience to the global recession.

Indonesia’s local and foreign-currency ratings were upgraded one level by Moody’s to Ba2, two notches below investment grade. Credit default swaps on its sovereign bonds have fallen to 1.85 percentage points from as much as 12.56 percentage points on Oct. 23 last year. Initially created to protect against defaults, swaps also are used to speculate on credit quality.

Political Continuity’

Standard & Poor’s grades Indonesia BB-, also two levels below investment grade. A positive outlook reflects the “policy continuity” after Susilo Bambang Yudhoyono was re-elected as President in July, S&P said. That could lead to a ratings upgrade if reforms, such as those on fuel and energy subsidies, are carried out, it said.

Pimco has bought Indonesia’s dollar-denominated debt maturing in 2019 and has non-deliverable contracts on the Chinese yuan, Lian said in a separate phone interview.

“Indonesia has got a huge potential for developing its domestic consumption and it has got rich resources that will benefit from demand emanating from China,” Lian said in the phone interview. “Yudhoyono has got a new mandate and the economic team is one of the strongest in recent times. The country is ripe for an upgrade.”

Indonesia’s 10-year dollar-denominated bonds and rupiah had their biggest gains since Sept. 16 when Moody’s upgraded the nation’s rating. The yield on the 11.625 percent note due in March 2019 dropped 25 basis points to 5.53 percent, prices from Royal Bank of Scotland Plc show. The rupiah rose 1.3 percent to 9,453.

Investors demanded a yield premium of 2.52 percentage points above U.S. Treasuries, according to JPMorgan Chase & Co., versus 2.68 points yesterday and 3.54 points three months ago.

Currency Bets

Lian said the Chinese yuan and the South Korean won are undervalued relative to their fundamentals.

“Policy makers in emerging Asia will warm to the benefit of currency gains in boosting households’ real spending power,” Lian wrote in the report. “Given our positive view on emerging Asia, we are attracted by a growing range of investment opportunities.”

Pimco, based in Newport Beach, California, likes South Korean A-rated corporate bonds sold by state-owned entities as restrictions on overseas borrowing limit supply of such debt. It owns dollar bonds sold by state-controlled companies including Export-Import Bank of Korea and Korea Development Bank.

The odds have increased that Singapore will resume its policy of seeking a stronger currency as the economy is growing on a more solid footing, Lian said.

The Singapore dollar has advanced 3.7 percent this year, compared with the Korean won’s appreciation of 6.5 percent and the Indonesian rupiah’s gain of 15 percent.

Twelve-month non-deliverable yuan forwards rose 0.2 percent to 6.6350 per dollar today, compared with a spot exchange rate of 6.8277. Forwards are agreements to buy and sell assets at current prices for delivery at a specified time. Non-deliverable contracts are settled in dollars.



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