Macroeconomic uncertainty has impacted Indonesian debt markets in recent years. But, after a period of disruption, prospects for domestic and offshore debt issuances are brightening
Stakeholders across Indonesian debt markets are quietly optimistic that the country’s lending outlook is improving after a challenging 18 months.
Indonesian borrowers and lenders have been impacted by rising inflation and elevated interest rates in the US. These factors have driven up the costs of servicing debt denominated in US dollars and put downward pressure on the local currency, with Indonesia’s central bank stepping in to support the rupiah as the dollar has strengthened. Debt markets also slowed in the lead up to Indonesia’s general election in February, with businesses and banks putting deals on hold until after the election.
Domestic dominance
Post-election clarity and falling interest rates in the US—the Federal Reserve cut its federal funds rate by half a percentage point at its mid-September meeting, with further cuts forecast for 2024—have had a positive impact on market sentiment. Dealmakers now expect domestic and offshore lending activity to rally in the coming months.
Disruption in global credit markets has benefitted domestic issuance of rupiah debt. In many cases, large conglomerates have opted to refinance dollar-denominated loans with rupiah financing, protecting themselves from higher dollar financing costs and the depreciation of the rupiah against the dollar.
Although these currency and debt servicing costs are now easing, Indonesia’s state-owned banks have demonstrated throughout this challenging cycle that they have the capacity and balance sheets to cover the financing requirements of Indonesian businesses. This has driven up the long-term appetite among not only Indonesian banks, but also foreign lenders, to sustain lending in rupiah.
Fitch expects corporate onshore debt issuance in Indonesia to remain robust through the rest of 2024, with capex and refinancing demand from corporate borrowers set to push domestic currency debt issuance to more than Rp65 trillion (US$4.2 billion) in 2024.
Domestic lending has also profited from a boom in commodity markets. Indonesia is a major exporter of commodities such as palm oil and the nickel used in electric vehicle batteries—the country accounts for more than half of the global nickel output. As demand for these commodities has soared, local banks and businesses have amassed large sums of domestic currency, meaning they have not had to raise expensive, foreign currency-denominated debt.
Domestic banks are also typically more comfortable lending to commodities businesses than, for instance, technology start-ups and fintech companies, which tend to favor offshore financing. As the post-pandemic tech boom has cooled, Indonesia’s economy has swung back to its core commodity base, playing to the strengths of local banks.
Another factor that has boosted domestic lending, particularly among state-owned lenders, has been an increase in the number of bankers with experience working in neighboring Singapore’s international finance hub. Many executives have relocated to Indonesia to work for local banks and other financial institutions, such as credit funds, deepening Indonesia’s talent pool and bolstering these companies’ expertise in more complex, structured lending transactions.
Offshore financing still on the radar
As resilient as the country’s domestic debt market has been, Indonesian issuers are still open to securing dollar-denominated financing from offshore markets if necessary.
The US Federal Reserve’s pivot to monetary easing will help lower the cost of dollar-denominated debt for Indonesian issuers, and the country remains interested in securing inbound investment for project finance, infrastructure and other key industries.
Indonesia’s sovereign wealth fund, the Indonesia Investment Authority, for example, has launched a hybrid capital strategy that includes coverage of private credit. The strategy is designed to direct financing from global private credit into sectors such as transport, logistics, health care and green energy, which would benefit the wider Indonesian economy.
International investor appetite for exposure to Indonesia is also strong. The country has the largest economy in Southeast Asia and has delivered average annual GDP growth of 5% during the past decade. The new government aims to drive growth even higher to an average of 8% over the next five years.
Even before the Federal Reserve’s mid-September rate cut, expectations for monetary easing in the US had already had a positive impact on investor demand for Indonesian bonds. Global funds invested US$2.2 billion in Indonesian sovereign bonds in August, the highest monthly total since January 2023, according to Bloomberg, with Indonesian bonds offering some of the best returns available in Asian markets.
After a quiet period for international financing in Indonesia, momentum is evidently building once again.
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