In the battle between Asia’s two highest-yielding major bond markets, Indonesia once again appears poised to gain the upper hand over India.
Global money managers are increasingly shunning Indian securities as Narendra Modi’s government hands out billions of dollars in tax cuts and subsidies to boost the prime minister’s appeal ahead of elections, blowing through the nation’s deficit target in the process.
In contrast, Indonesia’s improving fiscal status and aggressive monetary policy stance in the face of global headwinds have burnished the nation’s assets in the eyes of investors.
Comparison between two of emerging Asia’s two biggest economies are common given their similarities, and that’s especially true this year. Both run current-account deficits, are highly sensitive to shifts in US interest-rate policy, and face key elections in 2019.
“Indonesian bonds look more attractive given that yields are high, the economy is likely to do well and finances may be on a better relative positioning than India,” Manu George, Schroder Investment Management Ltd’s director of fixed income, said from Singapore.
Assets in both countries will be tested this week as India reports key inflation and factory output figures, while Indonesia releases trade data.
The yield on India’s widely traded 2028 bonds surged 13 basis points on February 1, the day Modi’s administration announced plans to sell a record Rs7.1tn ($100bn) of securities to finance the fiscal deficit for the year beginning April 1.
Not even a surprise interest-rate cut by the nation’s central bank last week has been able to fully stem the losses, as supply concerns weigh on investor appetite. Yields on similar-maturity Indonesia notes have declined 13 basis points this month.
Even with their recent rally, Indonesian 10-year securities still pay about 7.88%, the highest in Asia. That’s helped lure about $2bn in foreign portfolio investment this year, compared to outflows of around $743mn for India, according to data compiled by Bloomberg.
Investors are also avoiding Indian bonds amid increasing political uncertainty ahead of April-May elections. While Modi remains the odds-on favourite, his grip on power has looked more tenuous following regional defeats for his party late last year.
In Indonesia, President Joko Widodo looks well positioned to secure a second term when voters head to the polls in a little over two months.
“On a risk-reward basis, Indonesia probably looks more interesting than India going into elections,” said Timothy Ash, a strategist at BlueBay Asset Management in London. A “better public finance profile and very orthodox monetary and fiscal policy setting” bodes well for Indonesian assets.
Indonesia has forecast a fiscal shortfall of 1.84% of gross domestic product for 2019, while India this month widened its deficit target for the current and next fiscal year to 3.4% of GDP.
Throw in rebounding natural resource prices – Indonesia is a net commodity exporter, while India is an importer – and the Fed’s dovish pivot, which is largely seen as more beneficial to an Indonesian economy that was highly susceptible to capital flight in 2018, and you have a recipe for Indonesia outperformance in the near-term.
“Given the complex nature of Indian politics, investors are more worried about election uncertainty in India than in Indonesia,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc in Singapore. Rajpal said he’s overweight Indonesian bonds given the benign global backdrop fuelled by the Fed’s change in tack and falling US real yields.
Key Asian economic data and events due this week: Monday, February 11: China foreign reserves, Malaysia industrial production. Tuesday, February 12: Australia business conditions, Japan money stock, India CPI and industrial production, Singapore retail sales and Philippines trade. Wednesday, February 13: New Zealand rate decision, Japan producer price index, Australia consumer confidence, South Korea unemployment, Taiwan GDP. Thursday, February 14: Japan GDP, BoJ bond purchases, Australia inflation expectations, Malaysia GDP, India wholesale prices, China trade figures. Friday, February 15: China CPI, South Korea current account, Singapore GDP, Japan industrial production, Indonesia trade data and Thailand FX reserves.
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