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Indonesia’s Bond Discount to India Returns on Fiscal Concerns

Rupiah yield at widest premium to India’s since October 2022

Indonesia’s policy uncertain, India’s signal continuity: GAMA

Indonesia’s Bond Discount to India Returns on Fiscal Concerns

Indonesia’s bonds are underperforming their high-yielding Indian peers on concern over the incoming government’s relatively lax fiscal policies.

The extra yield on Indonesia’s 10-year note climbed to around 12 basis points above its Indian peer Wednesday, the largest premium since October 2022, according to data compiled by Bloomberg. The widening spread comes as both governments assess their costs of funding and seek to fulfill spending pledges made during elections in the first half of the year.

Indonesia’s bonds and currency have sold off since the middle of June following reports the incoming administration is seeking to eventually increase the debt-to-GDP ratio toward 50% to support its pre-election manifestos. President-elect Prabowo Subianto, who takes office in October, said this week he will adhere to fiscal prudence.

“Investors are concerned over the fiscal policy under Indonesia’s president-elect, as many of his announced policies would increase the deficit and a further rise in government debt,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management SA in Geneva. “India has signaled policy continuity, while Indonesia’s policies are more uncertain,” he said.

Prabowo plans to fund his spending pledges by steadily increasing the debt ratio to its highest in two decades. This would likely require budget deficits amounting to 4%-to-6% of GDP, breaching the country’s legal limit of 3%, according to estimates by Barclays. Despite recent signals to the contrary from the administration, markets are jittery, as taking debt to 50% of GDP had been raised by Prabowo at one of his presidential debates ahead of the February vote.

Funds Sell

With both economies somewhat reliant on foreign inflows into sovereign debt to fund budget or current-account deficits, there are stark differences between the movements. Global funds have withdrawn $262 million from Indonesian bonds in the second quarter, while boosting holdings of Indian debt by $762 million to put the notes on track for a sixth straight quarter of inflows.

So far, there have been no signs of fiscal laxity from the Indian government after the election.

Indian sovereign bonds remain attractive, partially due to the government’s commitment toward fiscal consolidation as well as inflation falling back to within the central bank’s target range, Goldman Sachs Group Inc. economists including Danny Suwanapruti wrote in a note last week.

“We see the yield advantage for Indonesia to stay,” said Aditya Sharma, a strategist at Natwest Markets in Gurugram, India. “We don’t see Bank Indonesia easing anytime soon and Indian bond yields might dip further if the new government under Prime Minister Narendra Modi sticks to a fiscal consolidation path in the upcoming budget.”

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