Golden Fibonacci

Jan. 11 (Bloomberg) — Indonesia may have to reward investors with higher yields than the Philippines to borrow $4 billion as an emerging-markets bond rally fades.

Southeast Asia’s largest economy may sell 10-year debt at a yield of about 6 percent, or 2.2 percentage points more than similar maturity U.S. Treasuries, according to Aberdeen Asset Management Plc and Vegagest SGR SpA. The Philippines, whose bonds carry the same BB- rating as Indonesia’s from Standard & Poor’s, priced 2020 securities last week to yield 5.67 percent.

“If Indonesia does come to the market as planned with $4 billion of issuance, that will come with a premium,” said Edwin Gutierrez, who oversees $5 billion in emerging-market debt for Aberdeen in London. “There’s a big rush to get out the door before U.S. Treasury yields rise further.’”

The Philippines and Turkey raised a combined $3.5 billion selling dollar bonds last week, while Vietnam, Russia and Poland are preparing sales to take advantage of record low U.S. borrowing costs. Pacific Investment Management Co., the world’s biggest bond fund, said last week it was “highly unlikely” developing nations’ dollar debt would perform as well as last year, when the gap between emerging-market and Treasury yields shrank 4.16 percentage points as interest rate cuts and stimulus spending revived the global economy from a recession.

The spread has narrowed to 2.70 percentage points, close to a 19-month low, according to the JPMorgan Emerging-Market Bond Index Plus.

Ratings Upgrade

Indonesia fared better than its neighbors in the economic slump, as growth in the $514 billion economy accelerated last quarter for the first time in a year. President Susilo Bambang Yudhoyono, 60, who won re-election in 2009, aims to boost the country’s expansion to more than 7 percent from an average of 5.1 percent last decade.

Indonesia’s dollar bonds are the second-best performing in the region, after Pakistan, giving investors a return of 46 percent in the past year, according to indexes compiled by HSBC Holdings Plc. Moody’s Investors Service on Sept. 16 raised the nation’s rating by one level to Ba2, two levels below investment grade, citing the economy’s resilience.

“This environment increases investors’ confidence that the country will move closer toward an investment-grade rating,” said Branko Windoe, the head of treasury in Jakarta at PT Bank Central Asia.

The government could attract investors with a spread of as much as 2.5 percentage points for the planned sale of 10-year and 30-year debt, Windoe said. Indonesia hired Barclays Capital Plc, Citigroup Inc. and Credit Suisse Group AG for the sale, a ministry official said last month.

Sri Mulyani Indrawati

Proceeds from the bond sale may help 47-year-old Sri Mulyani Indrawati reduce a budget deficit forecast to reach 98 trillion rupiah ($10.6 billion). That’s equal to 1.6 percent of gross domestic product.

Yudhoyono lured Sri Mulyani from the International Monetary Fund to become planning minister in his first cabinet in October 2004, and she became finance minister the following year. She shook up the government with a new set of remuneration packages, restructured the tax office and cleaned up practices that encouraged graft. In 2006, Sri Mulyani was named Finance Minister of the Year by Euromoney magazine.

“Indonesia has very sound economic fundamentals,” said Stefano Costagli, an investment consultant at Miniato, Italy- based Vegagest, which owns Indonesia’s 2018 and 2037 dollar bonds among $3 billion of assets. Still, “even if the appetite for emerging markets is very strong these days, Indonesia should offer some pick-up of at least 25 basis points,” Costagli said. A basis point equals 0.01 percentage point.

Rupiah Debt

Indonesia’s 11.625 percent dollar debt maturing March 2019 yielded 5.74 percent on Jan. 8, a premium of 1.9 percentage points over similar-dated U.S. Treasuries. They were sold on Feb. 27 to yield 11.75 percent, or 8.759 percentage points more than U.S. government debt. Similar-maturity rupiah debt yields 9.75 percent.

Pimco favors debt denominated in Polish zloty, South Korean won and Mexican pesos, where returns are being increased by currency appreciation, said Michael Gomez, co-head of emerging markets at the Newport Beach, California-based fund manager. It’s unlikely the EMBI+ will repeat last year’s 26 percent return in 2010, he said.

Aberdeen, Scotland’s largest money manager, has shunned sales of dollar-denominated bonds from the Philippines and Turkey, seeking higher returns in corporate debt. Aberdeen bought dollar bonds of Indonesia’s coal companies in the last quarter of 2009. PT Indika Energy Tbk’s 9.75 percent security due November 2016 yielded 9.16 percent on Jan. 8, a premium of 5.7 percentage points over seven-year U.S. debt.

“We just don’t see much value at these levels” for sovereign dollar debt, Gutierrez said.

To contact the reporters on this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net; Aloysius Unditu in Jakarta at aunditu@bloomberg.net