We have identified a short term AAA rated European Investment Bank bond in Indonesian rupiahs that matures in April of 2014, and have targeted a better than 7.25% yield for our clients.
Corporate Bond linked to Indonesian Rupiah
The European Investment Bank has bonds denominated in the Indonesian rupiah that will currently yielding over 7.25 % for 30 months. This short term debt instrument compares favorably with other high yield foreign currency bonds, returning a remarkably high yield when considering its relatively short maturity and its superior credit rating. The two and a half year issue offers a unique opportunity for laddering into shorter maturities and diversifying into a country that has weathered much of the global financial crisis relatively smoothly because of its heavy reliance on domestic consumption as the driver of economic growth, and we are very pleased to have found a great yield from such a highly rated and stable issuer. This rupiah bond fits extremely well into an overall strategy to utilizing the recently renewed strength of the dollar to diversify our clients away from the risk of over weighted US dollar based assets, and it is why we have chosen it for This Week’s Best Bond.
(More) US Dollar Concerns
The recent strengthening of both the US dollar and the Japanese yen appear to primarily be the result of the risk adverse currency trading, and the prevailing weakness and uncertainly surrounding the euro. Hopes that the euro could provide an alternative global currency have been dashed by the ongoing crisis in the eurozone, where Greece teetering on the verge of bankruptcy has put an ominous question mark over the future of the euro. So, even with America teetering on its own brink of a double-dip recession, replete with all time high levels of debt, printing of money, and unemployment, there is more demand than ever for the greenback. In other words, it’s akin to choosing the prettiest girl at an ugly dance.
In fact, this latest rise in the strength of the dollar has been so significant it prompted the Brazilian monetary authority (which earlier this year debated how best to abate the strength of the real) to sell $5.3 billion in “swap contracts” on Monday, the biggest such operation seen this year, to halt the depreciation of the real. Rarely do the markets allow any one player to hold all the marbles, or at least, not for very long. With a newer, leaner, more globalized than ever, market clearly in the fray, it’s not much a question of “if” things will change, but how, or when, or why. And while we don’t expect to see currencies becoming embroiled in a trade war in the imminent future, there does appear to be an increasing pressure on China to allow a faster appreciation of their currency, the renminbi.
Predictions of recession appear to be on the rise daily, and arguments can and are being made for a lengthier strengthening of the dollar. However, rapid changes in any currency’s relative valuation sparks “issues” that affect the health and well being of its underlying economy. In a nutshell, too much strength in the dollar has its own ill effects on our economy. A strong dollar hurts exports and makes financing our many trillions of debt more expensive. Given Helicopter Ben’s proclivity to print, perhaps the equivalent of “QE3” that the market pines for has already found i’s way into the coffers of European financial institutions instead of those here in the homeland. And noticed or not, more dollars are more dollars, no matter who or what they are given for.
Indonesia is the world’s most populous Muslim-majority democracy. President Susilo Bambang Yudhoyono has cracked down on corruption and tried to encourage much-needed foreign investment, but the weak rule of law remains a major impediment to attracting capital. Indonesia has undertaken wide-ranging reforms to address various structural weaknesses in the economy and to make it more competitive. Recent reform measures have put greater emphasis on improving the entrepreneurial environment, enhancing regional competitiveness, and creating a more vibrant private sector through decentralization. Management of public finance has been stable, and tariff barriers have been lowered
Indonesia is enjoying an economic boom, with growth of 6.5 percent, rising consumer spending, swelling incomes and a newly minted status as a middle-income country, with per capita GDP passing $3,000 this year. Indonesia’s debt-to-GDP ratio in recent years has declined steadily because of increasingly robust GDP growth and sound fiscal stewardship, leading two of the three leading credit agencies to upgrade credit ratings for Indonesia’s sovereign debt to one notch below investment grade. During the recession, Indonesia outperformed most of its regional neighbors. Although the economy slowed to 4.5% growth in 2009 from the 6%-plus growth rate recorded in 2007 and 2008, by 2010 growth returned to a 6% rate. The Indonesian central bank sees their economy expanding 6.6 percent this year.
On Wednesday of the week, the World Bank was reported that Indonesia will weather current economic strains in the global economy, even if investments in the portfolio sector suffer. Furthermore, their economic head in Indonesia, Shubham Chaudhuri, said, “The worst scenario is that the local economic growth only reaches 4.1 percent by 2012.” He went on to stress that the global crisis would deeply impact developing countries, but claimed Indonesia’s economic growth would not drop much as it is supported by strong local consumption and was not as dependent as on exports as countries like Malaysia and Thailand.
Annual inflation in September was 4.61 percent, below 4.79 percent in August and less than the 4.80 percent expected by most economists surveyed by Reuters, data from the country’s statistics bureau showed on Monday, cementing expectations that the central bank will hold the benchmark interest rate steady next week amid global uncertainty. As a member of the G-20, Indonesia is playing an increasingly important role in international economic policy discussions.
European Investment Bank
The European Investment Bank (EIB) is the European Union’ bank. The EIB is the largest multilateral lending institution in the world, and a leading sovereign-class international borrower. It raises substantial volumes of funds on the capital markets, which it lends on favorable terms to projects furthering European objectives. The Bank’s consistent AAA rating is underpinned by its strong capital base, exceptional asset quality, and a sound risk management and funding strategy. The shareholders of the EIB are the 27 European Union Member States.
EIB bonds have always been considered of the highest credit quality with a AAA-rating and a 0% risk weighting under Basle II (standardized approach). They have a credit rating of AAA from Standard & Poor’s, Aaa from Moody’s and AAA from Fitch.
The European Bank for Reconstruction and Development (EBRD)
The EBRD has similar debt issuances denominated in Indonesian rupiah, which is the reason for our mentioning them here in comparison to the European Investment Bank. Established in 1991, the EBRD has become the largest financial investor in their region of operations which stretches from central Europe and the Western Balkans to central Asia. Their mission is to help countries in the region to become open, market economies by investing primarily in private sector clients whose needs cannot be fully met by the market. They are owned and funded by 61 countries, the European Union and the European Investment Bank, and follow the highest standards of corporate governance and sustainable development.
EBRD’s authorized capital is EUR 21 billion (EUR 6 billion paid-in and EUR 15 billion callable). With EUR 20.79 subscribed, the EBRD has a solid capital base. The strength of the Bank’s capital and its prudent operational and financial policies are reflected in the EBRD’s credit rating of AAA from Standard & Poor’s, Aaa from Moody’s and AAA from Fitch.
The default risk is the European Investment Bank’s ability to perform. Given its large multinational support and its unanimous and impeccable credit ratings, it is our opinion that the default risk is very minimal compared to the currency risk of the Indonesian rupiah.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Indonesian economy.
Even with the strong growth outlook, many global investors still consider emerging markets relatively risky. Despite the progress toward economic restructuring, Indonesia still struggles with poverty and unemployment, inadequate infrastructure, corruption, a complex regulatory environment, and unequal resource distribution among regions. The government in 2011 faces the ongoing challenge of improving Indonesia’s infrastructure to remove impediments to growth, while addressing climate change concerns, particularly with regard to conserving Indonesia’s forests and peat lands, the focus of a potentially trailblazing $1 billion REDD+ pilot project. Although less directly impacted by European and United States debt woes, Indonesia’s economy will likely be further diminished if China and India’s economy fall in response to crises in Europe and the US.
How can investors participate in Indonesian rupiah denominated bonds? Achieving an institutional sized yield typically requires an institutional sized bond purchase. To facilitate attaining a more attractive yield, Durig Capital brings together many retail bond buyers into a single much larger institutional sized trade. In this week’s syndicate, we anticipate being able to accommodate purchases as low as $ 10,000 US Dollars should that the level that best fits with your interest. So the answer to the question is simple – contact your Durig professional.
The ongoing European crisis and threat of a Grecian default appear to have given somewhat of an artificial support to the US dollar, affording investors that may be overweighted in US dollar based assets an ideal window within which to diversify away from the dollar and into a basket of higher yielding global currencies. As the Indonesian economy continues to expand as a result of solid domestic growth and its commodity exports, it will continue to be seen as a young, high-growth market, where the risk lies primarily in overheating rather than national bankruptcy. As a result, it is our opinion that the short term, high yield debt, offered by an AAA rated financial institution, make this Indonesian rupiah denominated bond a superb diversification and fixed income selection, which is why we are adding it to our Foreign and World Fixed Income holdings.
Disclosure Durig Capital clients may currently own these European Investment Bank bonds.
To know more about this Indonesia Rupiah bond call our fixed income specialist at 971-327-8847