Foreign investors may shun Indonesian debt over CB woes

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    BENGALURU- Foreign investors are unlikely to rush back into Indonesian markets until either it pays more for its debt or gives hard evidence it will not push the central bank into longer-term monetary financing of public borrowing, fund managers say.

    External demand for government debt in Southeast Asia’s largest economy, normally prized for 7 percent yields that are increasingly rare even in the world’s emerging markets, has slumped since March with foreign holdings hitting a decade-low in August.

    Such inflows are essential for Indonesia as it strives to fund government programs to combat the coronavirus and restart an economy weakened by months of global and domestic restrictions.

    But proposals lodged in parliament this month to increase ministers’ influence over Bank Indonesia’s (BI) strategy, at a time when it is helping finance emergency government borrowing, have made securing investors’ faith more difficult.

    The bill is still at an early stage and deliberations may take months. While politicians have played down the threats to the bank’s independence, they also say moves in the bill to guarantee it will help buy government debt in emergencies are possible.

    “Since the very large outflow we saw post the initial COVID spike… flows have really been very lacklustre in terms of foreign appetite for Indonesian bonds,” said Stuart Ritson, an emerging market debt portfolio manager at Aviva Investors.

    “Certainly headlines like we’ve seen over the past few weeks which do question the central bank independence are likely to see investors be more cautious about allocating capital.”

    Ratings agency S&P Global told Reuters last week that Indonesia would need to manage the proposed changes carefully to prevent any pressure on its sovereign rating.

    Encouraged by the normalization of central bank bond buying in major economies over the past decade, ratings agencies and investors have given developing world governments more leeway this year on steps that would normally be taboo.