Bond market bustling this year: Analysts

A'an Suryana, The Jakarta Post, Jakarta

The domestic bond market is expected to thrive this year as investors are shifting funds from bank deposits due to a lower interest rate environment, and from the volatile stock market.

"It is likely that people will invest more in bonds this year," Raden Pardede from Danareksa Research Institute told The Jakarta Post last week.

According to Pardede, people would eventually reduce their exposure in stocks due to their declining values as equity markets worldwide fall together with plunges in the U.S. market.

"The decreasing value of stocks has made people refrain people from investing in the stock market, fearing that they might lose more money," Raden said.

Investing in bank deposits is not so attractive either amid declining interest rates as Bank Indonesia has been trying to guide its benchmark interest rate lower.

The interest rate on the one-month Bank Indonesia SBI promissory notes has declined to around 14.7 percent from over 17 percent earlier this year.

In comparison, bonds are now offering coupon rates of between 17 percent to 18 percent, while bank deposit rates hover at around 13.5 percent.

"Therefore, investors have begun to change preferences and are looking more at investing in bonds," said Raden.

Pension funds have reportedly increased their exposure in bonds also. For instance, PT Dana Pension Jasa Marga, the pension unit of state-owned toll road operator PT Jasa Marga, is planning to invest up to 50 percent of its total funds in bonds this year, compared to 45 percent or around Rp 45 billion previously.

According to data from the Surabaya Stock Exchange (BES), transaction volume on bonds issued by corporations surged to Rp 2.50 trillion in the January to July period this year, compared to only Rp 1.12 trillion for all of last year.

Transactions on government bonds were also robust as shown by the January-July period in which the volume had already reached Rp 60.96 trillion compared to Rp 64.69 trillion for all of 2001.

The government issued some Rp 430 trillion worth of bonds in the late 1990s to bail out ailing banks. A portion of the bonds are now being traded in the secondary market.

Raden said that transaction volume on dollar-denominated bonds for the January-July period of this year had already reached US$555 million, compared to $541 million in 2001.

Analysts said that investors have been keen on investing in dollar-denominated bonds because they often carry a coupon of 10 percent to 11 percent, compared to the interest rates of dollar bank deposits which average around 1.5 percent.

The recent bond issue by giant instant noodle maker PT Indofood Sukses Makmur got a strong response from investors, prompting the company to raise the size of the issue to $280 million from the initial plan of $200 million. The dollar bonds carry an interest rate of 10.3 percent.

The stronger investor appetite for bonds has also encouraged companies to issue bonds to raise cash for working capital, said Achmad Fadjar, a senior treasury officer at state-owned Bank Mandiri.

Retailer PT Matahari Putra Prima Tbk. and multi finance firm PT International Federal Finance are among the companies which will soon issue bonds.

According to data from BES, Matahari will carry out a book building process on Aug. 20, with a total bond issue estimated at Rp 300 billion.

International Federal Finance is planning to issue some Rp 200 billion worth of bonds.

"If the bonds are sold out, it could also be seen as evidence that investor confidence in the local corporate sector is turning around," he said.

Not only domestic investors, foreign investors are also increasingly attracted to invest in the Indonesia bond market.

Fauzi Ichsan, an economist at the Standard Chartered Bank, said that after the Wall Street downturn, investors have been chasing bonds outside the U.S. market, including Indonesia.

But Fauzi was quoted by the Kontan weekly as saying that the foreign hedge funds and fund managers entering Indonesia were only for the short-term investment due to lingering uncertainties here.

Fauzi said that a perception of a corrupt legal system was still a major stumbling block for investors to invest in Indonesia.

Despite the bustling bond market, analysts warned investors to be prudent in investing their money in the market.

"Investors should invest only in bonds, which are being offered by companies with good fundamentals," said Pardede.