NEWS

Although in the midst of global economic conditions that are still sluggish and clanged in uncertainty and the performance of domestic economic growth that has not run fast, but it does not dampen the interest of corporations to issue bonds.

Based on data from the Financial Services Authority (FSA), the realization of corporate bond issuance throughout 2013-2015 reached Rp 57.76 trillion, Rp 48.46 trillion and Rp 63.27 trillion, respectively. Meanwhile, until May 2016, the realization has reached Rp. 29.1 trillion.

The value of these emissions still has the potential to increase. Based on the projections of the Indonesian Securities Rating Agency (PEFINDO), the value of corporate bond issuance until the end of 2016 could penetrate IDR 90 trillion (Harian Kontan, 20/6).

If this happens, it is expected to be a momentum for the rise of corporate bonds. Admittedly, after the monetary crisis (1997/98), the penetration of corporate bonds in the capital market was far behind compared to Government Securities (SUN).

The tax amnesty policy is expected to be a trigger for the corporation's passion to issue bonds. The authority has included corporate bonds as an instrument to accommodate repatriation funds which according to Bank Indonesia (BI) could reach Rp. 560 trillion and according to the government reached Rp. 1000 trillion.

If it can be concluded, several factors have triggered stretching corporate bond issuance so far.

First is the performance of Indonesia's macroeconomic indicators, which tend to be positive and stable, particularly inflation, interest rates, and the rupiah exchange rate. These three macro variables become variables that determine the direction of the bond market.

Until May 2016, annual inflation (YoY) was still at the level of 3.3%. The government is targeting 2016 inflation at 4%. In addition, the rupiah exchange rate is also stable.

Rupiah is one of the exchange rates in the soft currency group with quite good performance. So far this year (YTD), the rupiah has appreciated around 3.2%. Better than last year which depreciated around 10.9%.

Positive inflation and the exchange rate became ammunition for Bank Indonesia (BI) to relax its monetary policy. During January-June 2016, the benchmark interest rate (BI Rate) was cut by 100 bps to 6.5% from the end of 2015 at the level of 7.5%.

Not only that, BI also reformulated the benchmark interest rate, which is to replace the BI Rate as a reference with a 7-days (reverse) repo that was effective in August 2016.

This reformulation is expected to make monetary policy more effective in influencing short-term interest rates. The fall in interest rates is expected to have an impact on lowering the cost of funds.

This has indeed happened. At present, corporate bond coupons with investment-grade ratings are slowly going down, ranging from 8% -9%. Lower than bank lending rates that are still above 10%.

Secondly, the stock market conditions are not yet stable. So far, the direction of the stock market is still volatile. This is reflected in the movement of the JCI which in the last three months tends to be 'pacing' at the level of 4800-4900.

The Brexit issue and the tug-of-up of raising the Fed Rate to external sentiments were quite dominant affecting stock market volatility.

This condition makes the corporation refrain from raising funds from the stock market both through IPO and the Rights Issue. During January-June (YTD), the JCI recorded a return of 5.2%. Meanwhile, corporate bonds have penetrated 14%.

The third impact of maturing bonds (mature). In 2016, the maturity value of corporate bonds reached Rp 48.3 trillion, which was dominated by the financial sector (finance and banking).

Corporations will normally carry out refinancing strategies, namely issuing new falling bonds to pay maturing bonds.

The four infrastructure funding needs. The value of infrastructure investment during 2014-2019 is estimated to reach Rp.5,500 trillion. The ability of funding from the state budget is only about 20%.

With these limitations, the government gives a special task to SOEs to be involved in infrastructure development, particularly from the financial sector, infrastructure, and construction.

In other words, SOEs will need large funds to realize the infrastructure development. Bonds are a source of funding.

In fact, in order to increase the leverage capacity of SOEs to access funding, the government has injected capital through the participation of state capital (PMN). This year the value could reach Rp 57 trillion.

Challenge

Although many factors are beneficial for corporations to access funding from the bond market, a number of challenges must also be considered.

First is the high need for government funding to cover the state budget deficit. This year the value is more than Rp 500 trillion (gross).

This prompted the government to be very aggressive in issuing Government Securities (SBN). Moreover, the existence of OJK Regulation No. 1 / POJK.05 / 2016 regarding SBN investment in non-bank financial services that requires a minimum of 20% of the managed funds must be parked in SBN.

This will increasingly suck liquidity from the market. Impact will hamper more access for corporations to raise funds from the bond market.

Second, sluggish growth performance can drive corporate financial performance down. This can encourage rating cuts.

The downgrade will increase the risk, which in turn can reduce investor interest to absorb bonds. Even if absorbed, it must be compensated with an increase in coupons (interest).

Written by: Desmon Silitonga-Analyst PT. Capital Asset Management