Indonesia Eyes Aussie Dollar Debt Debut Amid Investor Scrutiny

Emerging market issuer seeks diversification, but local managers weigh credit rating and portfolio fit.

Indonesia is preparing to launch its inaugural Australian dollar-denominated debt next month, a move that has generated significant investor interest. However, the issuance faces questions regarding its suitability for traditional Australian fund portfolios.

Challenges for Local Funds

The Australian sovereign Kangaroo market is relatively niche, and Indonesia’s offering may not align with established supranational debt from developed economies. Concerns exist that certain funds might be unable to hold these bonds due to Indonesia’s sub-investment grade credit rating, according to Jamieson Coote Bonds Pty.

Chamath de Silva, head of fixed income at Betashares in Sydney, commented on the potential placement challenges: “An EM kangaroo bond doesn’t exactly fit neatly into the traditional Australian bond sectors.” He added that inclusion in major indexes could entice local investors, noting, “That said, if the concession is attractive, I’m sure local real money might be tempted.”

Diversifying Funding, Deepening Ties

The planned sale aims to broaden Indonesia’s funding avenues and strengthen its relationship with Australia. It would mark only the second instance of an emerging-market sovereign issuing Australian dollar debt, a market predominantly featuring developed issuers and supranational entities.

Kangaroo bond sales have been robust this year, approaching A$41 billion, on track to surpass last year’s record A$61 billion. This follows South Korea’s successful Australian dollar bond issuance in the previous year.

Global Appeal Amid Market Turbulence

The issuance could prove attractive to global fund managers navigating volatile markets, particularly amid concerns surrounding U.S. fiscal spending and Treasury markets. Indonesia’s yield spread on its 10-year dollar bonds relative to U.S. Treasuries has tightened since May, supported by the government’s commitment to fiscal discipline and recent monetary easing by Bank Indonesia.

Joshua Rout, a portfolio manager at Franklin Templeton in Melbourne, expressed keen interest: “We’ll be following the deal closely. Why wouldn’t you invest in bonds from debt-conscious sovereigns issuing at a spread over US Treasuries at a time when US fiscal policy looks wildly unsustainable?”

Targeting Sovereign Wealth and Reserve Managers

TD Securities strategist Prashant Newnaha suggests the issuance will likely target sovereign wealth and reserve managers, rather than Australian domestic funds seeking emerging market exposure, due to potential liquidity constraints. He acknowledged, however, “its clear there is a significant pool of Australian dollars to tap.”

James Wilson, a senior portfolio manager at Jamieson Coote in Melbourne, highlighted the rating hurdle: “While Indonesia’s planned offer is interesting, it would not meet the rating requirement of a number of our portfolios.” Indonesia’s credit rating from Moody’s Ratings stands at Baa2, the second-lowest investment grade.