GlobalMarkets: Let’s begin by talking about Indonesia’s growth and growth prospects.

Aldian Taloputra, Standard Chartered: Fromthe market’s perspective the country has one ofthe fastest rates of growth of all G20 countries.Only China and India have faster rates of growth.

Since 2015 and the arrival of the new adminis-tration, the government has been trying to re-vamp the investment climate to move from a com-modity-based economy to a more value added in-dustry one.

It has forced the country to take some shortterm, bitter pills such as the not very popular pol-icy of cutting the fuel subsidy, which resulted inhigher inflation and forced Bank Indonesia to in-crease interest rates.

After those difficult measures, the economynow appears to be in a good position, having sta-bilised. We saw momentum begin to build in 2016.

For this year we believe the prospects are bet-ter. Commodity prices have started to show somerecovery and although we don’t expect oil to beback to $100 per barrel and revive strong invest-ment in the mining sector, it at least provides re-

lief because the economy is still heavily relianton the commodity sector.

However, we believe reforms like infrastruc-ture and structural reform will be the backboneof growth in the medium to long term. So, whilethe government probably thinks growth can bebetter, compared to other countries in the regionand elsewhere, it is not at all bad.

Aaron Gwak, Standard Chartered: The Indone-sian Republic recently conducted a number ofroadshows in the US, London, the Middle Eastand Asia.

The reactions from institutional investors,globally, were very positive, not only on the econ-omy, but also on the bond issuance programmesthat the Indonesian Republic has been maintain-ing. And if secondary asset prices are any guidein terms of their satisfaction, one of the most re-cent issuances by the Republic of Indonesia —the $3bn dual tranche sukuk — is trading a goodshade above par in today’s market. Since the be-ginning of the year, from an asset price perspec-tive, it is one of the best performing assets acrossthe Asian curve.

Susiwijono Moegiarso, Indonesia Eximbank:The government is confident in its strong growthlevels and is supported by the fact that Indonesiahas become one of the three countries amongG20 members with the highest growth rate inrecent years. It will be challenging to achievethe 6% growth rate in 2018, for it will need notonly growth from the domestic economy, but alsoa conducive global macroeconomy.

GlobalMarkets: Robert, when you are on yourroadshows, what kind of questions are you field-ing about the country’s economy?

Robert Pakpahan, Republic of Indonesia: Re-garding the performance of our economy in theeyes of our investors on our roadshows, most ofthem appreciate and think we are quite far aheadcompared to many other countries.

Some of them even think that we should beable to achieve higher economic growth if we arewilling to increase our borrowing and relax ourspending limits. However, other investors areappreciative of our efforts and think we are doingthe right thing because economic growth above

As one of the fastest growing economies of all the G20 countries, Indonesia is on the up. Having taken somedifficult decisions after coming to power in 2015, Joko Widowo’s administration is reaping the rewards withgrowth accelerating, a budget deficit below 3%, and inflation tamed. The benign economic background hashelped the Indonesian government become one of the most sophisticated sovereign borrowers in the interna-tional market. At GlobalCapital ’s roundtable in Jakarta in early April, hosted by Standard Chartered, leadingbankers and issuers gathered together to look at the impact of reforms to state-owned enterprises, potentialUS interest rate rises, and changes to tax laws on the potential to make a deeper, more effective debt market.

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5% is quite remarkable at the moment comparedto many other countries.

Investors have appreciated our prudence andour consistency to maintain the deficit below 3%.Last year the deficit was 2.46%, and then this year,according to our State Budget, it is set to be 2.41%.Maintaining the deficit below 3% is somethingthat really is a positive point for the governmentand helps gain investors’ trust. The debt to GDPlevel of 28% is also something that, according toinvestors, is comforting to them.

Investors also see positive signs from the di-rection of fiscal policy. We have addressed thesubsidy issue. We are now addressing revenuesthrough tax reform, which is now a priority. Interms of the spending side investors are quitehappy with the direction we’re taking but nowthey really want us to look at our revenue sidebecause our tax ratio is quite low.

GlobalMarkets: Do any other of our issuersagree or disagree with this prognosis?

Orias Petrus Moedak, Pelindo III: From the mar-ket’s perspective it’s correct, but from the realsector — I come from the ports business side —the challenge is not about growth itself but howthe wealth generated from that growth is distrib-uted among the remote areas of the country. Weare in Surabaya and we have the small islandsin the southeast of Indonesia that really need tosee the impact of that growth. East Java has hadgood growth — higher than the overall country’sgrowth I think — but the present challenge is theeradication of poverty.

Iman Rachman, Pelindo II: One indicator of thegrowth is export-import growth. It is beginningto pick up and we have seen this in the cargo vol-umes over the last year. Another contributingfactor is the development of our ports. We haveto complete the work on our Kalibaru and Kijingports by 2019. By having some of the big portscompleted we will be supporting the growth tar-gets of Indonesia.

Taloputra, Standard Chartered:That also reflectsthe regional growth in the eastern part of the coun-try — as Orias said, it’s faster than the nationallevel, for instance. For example, Sulawesi wasgrowing by close to 7% year on year in Q4 2016.

GlobalMarkets: We have seen fantastic conditions in global capital markets over the lastthree months. However, the wider world hasmany challenges. A new US administration, elections in Europe, a slowing China, a tighteningFed, trade deals in decline, geopolitical tensionsin North Asia. But what are the key external risksas far as Indonesia is concerned, Robert?

Pakpahan, Republic of Indonesia: The depth ofthe domestic financial sector in Indonesia is oneissue because it is not as deep as we would like it,at least when held up against the size of our econ-omy. The total assets in the banking sector — suchas savings, assets under management for pension

funds, insurance etc —are not as high as inother countries. A resultof this is that foreignownership in the localcurrency equity andbond markets is high.This is a risk as it makesus vulnerable to moneymoving out of the coun-try quickly when thereis a big external event.

So all those risks youmentioned could be felthere in Indonesia throughcapital flight. This is whyit is so important for usas a country to maintainvery consistent and cred-ible economic growthwith the right direction of fiscal policy and alsovery stable monetary policy to make sure the ef-fects of any external issue or shock are minimised.

So far we have shown that our fiscal policy isgoing in the right direction. We are addressingour spending. We are maintaining our deficit ata safe level while our monetary authority is main-taining stability. Inflation is now quite tame at alevel of between 3% and 4%, the current accountdeficit also has been maintained at a level ofbelow 2.5%.

GlobalMarkets: When you say the flows in andout are you referring to foreign ownership ofgovernment bonds or are you talking about allproducts across the financial sector?

Pakpahan, Republic of Indonesia: Both, and I’mreally talking about hot money. We are not thatconcerned about foreign direct investment be-cause that tends to stay in the country, but ratherportfolio investment that tends to build up butthen rush out when there is a problem.

Susiwijono Moegiarso, Indonesia Eximbank:The key external risks for Indonesia among oth-ers are: the global economy that has not fully re-covered; the global financial market which isstill highly influenced by uncertain policies ofthe US government; and China’s rebalancingeconomics.

Silvano Rumantir, Mandiri Sekuritas: On themacro side a key external risk factor we see isChina. China is the top three for both export des-tination as well as direct investment into Indone-sia. Our sensitivity analysis shows that every1% increase in China’s economic growth has animpact of, or a contribution of 0.11% to Indone-sia’s economic growth If you look at Japan andUS for us it’s only half of China’s impact.

Taloputra, Standard Chartered: If I have tochoose between the risks mentioned earlier, therate hike poses the biggest risk for the country,mainly because it runs a current account deficitthat makes it rely on external financing.

We have seen the vulnerability of the countrydecline in the last few years, given the prudentfiscal policy that Robert mentioned, as well asthe monetary policy, which is very prudent. BankIndonesia has not hesitated in increasing the in-terest rate to stabilise inflation and has becomemore flexible in managing the exchange rate. Amore flexible exchange rate provides a buffer toexternal shocks.

However, we are still running a current deficitof around 1.8% of GDP. While this is a very man-ageable level — the safe level is 3% — there is arisk-off event it could trigger an outflow whichwould result in pressure on the currency.

GlobalMarkets: You wouldn’t notice thoughwould you, the impact of a rate rise by the Fed onyour bonds? You issued after the rate rise andyou have cheaper debt than you would have done

ALDIAN TALOPUTRASTANDARD CHARTERED

AARON GWAKSTANDARD CHARTERED

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Participants:Robert Pakpahan, director general of budget financing and risk management, Ministry of Finance,Republic of Indonesia

Aaron Gwak, head of capital markets, Asean, Standard Chartered

Aldian Taloputra, senior economist, Indonesia, Standard Chartered

Iman Rachman, finance director, Pelindo II

Orias Petrus Moedak, chief executive, Pelindo III

Silvano Rumantir, president director, Mandiri Sekuritas

Susiwijono Moegiarso, acting executive director, Indonesia Eximbank

Toby Fildes, managing editor, GlobalMarkets, GlobalCapital

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the week before the rate rise, so explain that to me!

Pakpahan, Republic of Indonesia: The markethad got a little ahead of itself and probably pricedtoo much in ahead of the rate rise. After the FOMCannounced the higher rate US Treasury yields de-clined. Sometimes this financial market confusesus all! But anyway, the government of Indonesiais happy. We launched the US dollar sukuk dealafter the FOMC decision and we got a better dealthan we would have done before the rate rise.

Sometimes it is difficult dealing with a FedFund hike, but in general we know the generaldirection of travel — the interest rate is going toincrease. That’s why one of the strategies of thegovernment of Indonesia is to complete all of ourinternational bond market activities in the firstsemester of 2017.

GlobalMarkets: Excellent timing nonetheless.

Gwak, Standard Chartered: Over my careerI’ve wanted the issuer to have a little bit of luckin picking markets and windows. Sometimesthere’s obviously a general plan behind it, butsometimes it’s just that particular day.

But what I’ve noticed through meeting withinvestors globally is that the fundamental ap-petite for Indonesia is very strong. So, yes,where the Treasuries trade on a particular daywill influence the ultimate coupon and the pricethat Indonesia has to pay, but overall demandfor Indonesia risk is robust.

Fundamentals I think do still play a big partand the fundamentals of Indonesia are currentlyin fashion.

GlobalMarkets: The Indonesian governmenthas, of course, established itself as one of themost sophisticated sovereign borrowers in theinternational markets. How is this important forthe development of debt capital markets in Indonesia?

Moegiarso, Indonesia Eximbank: It is very im-portant as this reflects the credibility of the sov-ereign in the eyes of international investors. Todevelop our debt capital market, we still need in-fluence from international investors’ investmentto attract domestic investors.

GlobalMarkets: What are the opportunities for other Indonesian borrowers to access the international markets?

Rachman, Pelindo II: We issued a global bondin 2015, a 10 and 30 year $1.6bn deal. We have anatural hedge because some of our income is inUS dollars so that is why we can issue in dollarsrather than solely Indonesian rupiah bonds. Sec-ondly, our port development projects requirelonger term debt, which is not always availablein the local currency bond markets but can befound in international dollar markets. Addition-ally our ratings are very similar to the govern-ment of Indonesia so we can issue at very similarrates to the sovereign.

Moedak, Pelindo III: Yes, it is fortunate for Pelin-do II that they have long term contracts with USdollar income. Right now, for us, we cannot usethe US dollar market because the exchange rateversus the rupiah is not favourable and our fund-ing needs are in rupiah. So if port companieswant to issue dollar bonds I think the challengewill be the exchange rate.

GlobalMarkets: Because it will need an expen-sive derivative.

Gwak, Standard Chartered: Asset-liability andlength-maturity matching are some of the rea-sons why a lot of issuers, pan-region, look to theinternational bond markets to issue. It’s a marketwhere 30 year liquidity is plentiful, and in fact 30year liquidity is sometimes more plentiful thanshorter term liquidity.

GlobalMarkets: What role has the sovereignplayed in setting a benchmark for non-sovereignborrowers?

Pakpahan, Republic of Indonesia: Certainly oneof the roles the government plays is to providea reference to potential corporate borrowerswhen we issue in the dollar market.

Gwak, Standard Chartered: For example, In-donesia Eximbank was the most recent issuerand when they came to market, they very suc-cessfully priced at a premium of about 25bp-35bpover the sovereign. But the fact that it is refer-enced is really thanks to Robert and his team’sefforts to establish a yield curve that is not onlyout there, but also actively traded and thereforea very good reflection of the current risk premi-ums that you need to pay.

Rumantir, Mandiri Sekuritas: From our perspec-tive at Mandiri, obviously we deal with a lot oflocal corporates as well as State-owned enter-prises [SOEs]. As Aaron said, the more estab-lished the sovereign curve is then the more ref-erence is available for non-sovereign issuers.

Typically, with very few exceptions, the non-sovereign can only access tenors less than whatthe sovereign can access. Even Eximbank issueda seven year as opposed to a 30 year — not be-cause they cannot, but they want to match on theLM side of things. If you look at the private sectorcorporates, the sweet spot is even less — five,maybe seven years. So clearly there is a directrole that the government is playing by becominga regular issuer of local bonds.

GlobalMarkets: Despite the local currency requirements, can we expect the non-sovereignissuer base to continue to grow over the nextcouple of years?

Gwak, Standard Chartered: One of the thingsthat we did hear being asked, when going out tomeet with investors and through our tradingplatform, was the participation of SOEs in termsof issuance because it’s been quite a while since

the SOE sector has been prolific in issuance.From an international investor perspective,

now that we have a very liquid and well estab-lished yield curve for both conventional bondsas well as sukuk set by the Republic of Indonesiaas well as the euro curve that it is building, whyaren’t more people taking advantage of it? Wehave a few that have very good liquid points inthe market, but we just haven’t seen more of itand investors are keen to see more of it.

Rumantir, Mandiri Sekuritas: The market hasnoticed that some of the previously regular non-sovereign SOE issuers have not been in the mar-ket for a few years — the Pertaminas, the PLNs,for example. Although I’m sure they’re lookingat the market on a regular basis, they have notbeen active recently. But we probably shouldlook at this in a positive light, because, one:maybe they don’t need as much liquidity fromthe external offshore bond market, and two, theyhave alternative sources of funding.

GlobalMarkets: Are the much-vaunted reformsthat are coming into the SOE sector, by which Imean the consolidation of various industries, mak-ing people pause to see what’s going to happen?

Rumantir, Mandiri Sekuritas: It depends on theindustry sector. In the case of Pertamina, for ex-ample, obviously there’s a global commodity pricethat is affecting their capex. Whereas, for Perusa-haan Listrik Negara (PLN) the reasons are verydifferent. It’s very domestic. It’s very budget-dri-ven. It’s very affordability-driven as well. So itvery much differs between one SOE and the other.

Gwak, Standard Chartered: Liability manage-ment activities should also be considered as partof this discussion. Standard Chartered andMandiri Sekuritas jointly helped Pertamina doopen market repurchases of some of their bondsthat were a little undervalued. It wasn’t a hugeamount but it was substantial enough.

GlobalMarkets: Robert, why have the SOEsbeen so quiet over the last couple of years?

Pakpahan, Republic of Indonesia: For Pertaminathey don’t have liquidity issues. They have hadenough money over the last two years, despitedeclining oil prices.

PLN does actually need financing because ithas got assignments to build 35GW of power ca-pacity, although they got a loan from a multilat-eral, which might partly explain why they havenot come to market yet. But I think soon theywill come to the market.

Pelindo has come in, Eximbank has come inand we will see more come in.

If you look at the infrastructure developmentin Indonesia, around 40% will be handled by ourstate budget but around 25% will be built and fi-nanced by the SOEs. The state can help themwith capital injections but they will need to goout and raise capital as well.

There is a lot to do — a lot of assignments have

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already been handed out and will be handed outthat will need private financing, such as power,toll roads, ports, water, airports, rail links.

So certainly, the demand for financing will bethere. If the revenues are in rupiah then they willprobably have to issue in local currency. But ifthey have some revenues in US dollars, like Pelin-do and Pertamina have, they can issue in US dol-lars. But whether it’s in the domestic market orthe global market, soon we will see more andmore demand to issue bonds.

Gwak, Standard Chartered: I agree with Silvano’searlier point about looking at it from a positiveperspective, and as Orias has mentioned as well,I think there are a lot of liquidity alternatives toa dollar bond. Gone are the days when a dollarbond was the only option for Indonesia. Nowthere’s quite a prolific domestic rupiah bond mar-ket that a number of construction companies, forexample, have accessed, or are in the process ofaccessing.

And although the tenor hasn’t yet extended allthe way to that of the international bond markets,at least there’s certainly some scope for that. Andwe shouldn’t forget the loans and bonds discus-sion. The ability for banks to lend in domestic cur-rency, as well as foreign currency onshore, hasincreased greatly in recent times.

GlobalMarkets: That brings us on to the standards and requirements and the concept of ratings. Aaron, what are the extra requirementsfor issuers contemplating international markets?

Gwak, Standard Chartered: International in-vestors are obviously chasing one thing —yield. So the higher the yield the better. Obvi-ously, there is a fine balance between yield andcredit appetite. But in general, because there’san underlying demand for Indonesia as a credit,that’s been very helpful. So even across differ-ent maturities, in fact, investors are very willingto participate.

Now, one of the things we have really yet tosee, from a structural perspective, is corporatehybrids, a type of deal that gives equity account-ing credit for corporates that issue perpetualbonds. But most of the Indonesian companiesand especially the SOEs have quite prudent lever-age policies and so are not really in a position tohave to contemplate such deals.

Investors are generally incredibly liquid andlooking for opportunities to invest.

GlobalMarkets: Does that mean their standardsmight drop a little?

Gwak, Standard Chartered: No, it’s not so mucha question of standards. It doesn’t mean investorsare willing to see covenants start to fall away. It’sless from a demand pool perspective but morefrom a supply perspective.

GlobalMarkets: But let’s say if there was thatsupply, what are the requirements the interna-tional investor will be needing from issuers?

Rumantir, MandiriSekuritas: It dependswhether we’re talkingabout first time issuersor repeat issuers. Fordebut issuance in the in-ternational markets byissuers that have accessto domestic bond mar-kets, it will still be an up-grade in terms of re-quirements, but it willnot be as cumbersomeas for a company thathas never entered anybond market.

Rachman, Pelindo II: Ihave a quite interestingexperience regardingroadshows. We did a non-deal roadshow afterwe issued in May 2015. Then last October we dida non-deal roadshow for the investors. Before wedid the latest roadshow our pricing was belowpar while on other issuers’ bonds the pricing wasabove par. However, once we had completed ournon-deal roadshow we noticed our pricing hadmoved into line with others. We concluded thatinvestors value communication with the issuer,and they like it on a frequent basis.

Gwak, Standard Chartered: That’s right. TheRepublic of Indonesia is certainly a beneficiaryof consistent investor outreach; they have beengoing out to meet investors on a regular basis,and at the same time, investors feel that there’sa clear channel of access to information when re-quired. This has been the mantra that Robert’steam has consistently built for many years, eventhrough some of the more difficult times for theeconomy. A few years ago when the economy wasgoing through current account issues, it didn’tstop them from going out to engage with in-vestors. People remember that and obviously givethem credit for that. So I absolutely agree that aconsistent outreach and the fact that people feelcomfortable that they can always access the man-agement and get information they need, is key.

Moedak, Pelindo III: All the SOEs that want toissue foreign bonds can fulfil the requirementsof international institutional investors. But an-other issue is the approval process for offshoreborrowing. In the past we needed six high levelofficials including the central bank governor andmaybe that made many Indonesians a bit reluc-tant to go through that process. Now I hear theprocess only requires three senior officials butI think that’s still a challenge. I suppose it meansthat if the company really needs the financingthen the management will be prepared to gothrough that process.

GlobalMarkets: Given the amount of fundingthat’s going to be required over the next coupleof years is that a process that people are happywith? Three is better than six I suppose.

Moedak, Pelindo III: If the company needs thefunds then it will go through the process. It is asimple process, but it just needs time.

Pakpahan, Republic of Indonesia: The govern-ment is revising the regulations — they realisethe need for the process to be simplified. But itis just trying to keep an eye on the amounts beingborrowed — it is part of the risk managementprocess.

GlobalMarkets: How do we go about making adeeper, more effective swap market?

Gwak, Standard Chartered: Unfortunately thereis not a silver bullet solution — it will take time.But it is beginning to improve and it will certainlycontinue to improve going forward.

GlobalMarkets: Orias, you mentioned earlierthat you would probably raise domestic currencybonds because your revenues are in rupiah. But ifthere was a deep and efficient swap marketwould you consider issuing in foreign currency?

Moedak, Pelindo III: When I was back at PelindoII we discussed swaps and hedging. We agreedthat if the total cost was close to the domesticmarket we would probably stick to the domesticmarket. Size is of course important though — ifyour requirement is over Rph10tr then you arebetter going overseas.

GlobalMarkets: We’ve mentioned ratings a fair amount so far, but is an international rating always necessary when contemplating international markets?

Gwak, Standard Chartered: In Asia morebroadly, we have seen more unrated issuerscome to market recently. Certainly, there havebeen a lot of Chinese names, the Lenovos of theworld, for example, doing very big transactionsin Reg S-only format on a non-rated basis.

For Indonesia, certainly from an SOE perspec-tive, the rating has helped. Having said that,Standard Chartered was involved, in 2015, with

IMAN RACHMANPELINDO II

ORIAS PETRUS MOEDAKPELINDO III

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Garuda when it did a highly successful unrated$500m sukuk.

So is a rating useful? Absolutely. But we areincreasingly finding, especially for shortertenor issuance, that liquidity is so deep andplentiful that those investors who require a rat-ing are being outweighed by those who do notnecessarily need a rating to invest, but are look-ing for more value.

GlobalMarkets: That presumably isn’t neces-sarily a sustainable model, though. We’ve gotvery benign markets at the moment, but thatcan change very quickly.

Rumantir, Mandiri Sekuritas: As a general rule,the liquidity pool inherently shrinks when theissue is unrated. This is due to the simple factthat a large group of investors globally, and tosome extent domestically, have an internal re-quirement for rated issuance. Having said that,there is also the private placement market orMTNs where liquidity is not as deep as the pub-lic market, but it may suit some unrated issuers.

Rachman, Pelindo II: One reason why we needa rating is that as an SOE we are sometimes au-dited by the state auditors. By having a ratingfor a global bond or local bonds it makes it eas-ier for us to be compared with others and ex-plain why our pricing is higher than the gov-ernment’s.

GlobalMarkets: Now, Standard & Poor’s stillhas Indonesia at below investment grade. Itdoesn’t sound like everybody’s waiting for a fullhouse of investment grade ratings to issue —demand is such that you could probably dodeals whenever and wherever you wanted. Butdo you think it has had an impact?

Pakpahan, Republic of Indonesia: It may havehad an impact — there are some funds that haveinternal rules that prevent them from buyingus without an investment grade rating fromS&P. But I must say that so far it feels like wehave been treated as an investment grade issuer

by investors, if youlook at the high de-mand for our bondsand the pricing we havebeen able to commandin the market.

GlobalMarkets: Indeed, you were ableto attract a huge over-subscription for yourrecent sukuk despitenot having an IG ratingfrom S&P.

Taloputra, StandardChartered: Most ofthe bond indices thatfund managers followalready put Indonesia

at an investment grade weighting. So, like theJP Morgan EMBI index, most conventionalfund managers already treat Indonesia as in-vestment grade. When S&P does upgrade thecountry we will probably see some additionalinflow from non-conventional funds such aspension funds and insurance companies, es-pecially from countries with low interest rateslike Japan.

GlobalMarkets: What tax reforms could helpthe Indonesian bond market develop?

Pakpahan, Republic of Indonesia: The taxamnesty certainly should help because therehas been more than Rph100tr of assets repa-triated from outside Indonesia. I know mostof these assets are still placed in the bankingsystem. According to the law they have to stayinvested in Indonesia for at least three years.Some of them are still in foreign currency.They’re trying to find the instruments to chan-nel out the asset. But slowly this money willbe invested: some of it will go to bonds, eithergovernment bonds or corporate bonds. Sothere is potential there I think from the taxamnesty.

Other than that, there is also a simplifica-tion in the real estate investment trust sector,which in the past was subject to double taxa-tion in Indonesia. Now the double taxation hasbeen removed and it has reduced the tax bur-den significantly. That also may help capitalmarkets, especially the liquidity in this typeof instrument.

Moegiarso, Indonesia Eximbank: Perhapssome tax incentive mechanism can be consid-ered for domestic investors, whereby the biggeramount of investment in the capital market,the bigger tax discount can be applied to theinvestment gain.

GlobalMarkets: Aaron, you mentioned hybridbonds earlier. But what about high yield issuers? How responsive are international mar-kets to high yield issuers from Indonesia?

Gwak, Standard Chartered: A case in point wasIndika Energy’s successful deal in early April,which was testament to the re-opening of thehigh yield market as a cost-effective source offunds for Indonesian corporates. Demand forIndonesia continues to be good and with the re-covery of commodity prices in general, I thinkinvestors are becoming even more comfortablein putting money down.

GlobalMarkets: Do you expect to see a lotmore over the next six months?

Rumantir, Mandiri Sekuritas: The honest an-swer is, we sure hope so: But the real answer isthat corporates are reviewing their options verycarefully. Some of the most sophisticated cor-porates are fully aware of what’s happening inglobal markets. I think they are anticipatingsome asset reallocation, also in the equity sideof the market  — a flight to quality and more al-location to the US. We have seen a lot more highyield issuers from Indonesia in the last two orthree months than we have in the last two yearsperhaps and all of them, I daresay, have metwith very good responses.

You have companies who went through re-structuring or who come from so-called de-pressed industries such as mining and they’vebeen able to come to the bond market with fly-ing colours. So, if that kind of market backdropcontinues that is certainly going to motivate alot of other corporates to either consider refi-nancing early or just take funding from the tablebefore the market changes. This is especiallytrue considering the dynamic on the Fed’s policystance, where the issue now is not only policyrate normalisation, but also the possibility ofthe Fed reducing its balance sheet.

GlobalMarkets: We’ve obviously had fantasticconditions the last two or three months and therealists in all of us do worry that markets canturn. Is there a sense that the markets will haveto change sooner rather than later or can theycarry on?

Gwak, Standard Chartered: In general it’s dif-ficult to say because, as you said, the realist inyou will note that cyclicality is inevitable. Itdepends on just how long that cycle, or curve,can continue for. It doesn’t seem to be a con-cern around liquidity per se, which would sup-port the view that this will continue for quitea while. But if you take the view that sentimentunfortunately can move quickly, then that’swhat worrying more people.

GlobalMarkets: Is Indonesia more vulnerableto that quick shift in sentiment perhaps thanother countries within its rating bracket?

Gwak, Standard Chartered: No, I don’t think so.

Pakpahan, Republic of Indonesia: Looking atthe general levels of appetite and activity, in-vestors are quite consistent — they like our cred-

SILVANO RUMANTIRMANDIRI SEKURITAS

ROBERT PAKPAHANREPUBLIC OF INDONESIA

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it. I remember the taper tantrum when therewere outflows but things rebounded very quickly.Liquidity was always there and it was only a mat-ter of months before things got back to wherethey were.

Rumantir, Mandiri Sekuritas: Market shockswill inevitably continue to be there. We can’t beunder any illusion that Indonesia will be totallyisolated from market shocks. However, despitethe 37% or 38% foreign ownership of governmentlocal currency bonds and roughly 50% of foreignfunds in the IDX on the equity market, you haveto look at the fundamentals.

This is evidenced by the support from the rat-ing agencies — despite S&P’s stance. Moody’sand Fitch not long ago revised their outlooks ontheir already investment grade ratings to positiveoutlooks. This means that Indonesia’s rating hasthe chance to be upgraded to BBB in the next sixto 12 months.

GlobalMarkets: We’ve already mentionedsukuk and of course the sovereign recently didits blowout deal. But what can be done to further develop the market and broaden its appeal to both issuers and investors?

Rachman, Pelindo II: Yes, the issue with us, asI’ve mentioned earlier, is that our funding needsare around 13 to 15 years but the sukuk market’ssweet spot is shorter than that, around sevenyears. Size is also an issue — I’m not sure thesukuk market could cater for large deals suchas our $1.6bn global deal of 2015.

Gwak, Standard Chartered: You diversify whenyou want to expand the different pockets of de-mand you have access to. Which is what the Re-public is doing. It has access to the US dollarconventional market, it has developed the sukukmarket, it has developed the euro market, andthe yen market. So it now has a very diversepool of pockets of investors that it can tap into.

One of the things that have changed in thesukuk market, most recently, is the inclusionof Islamic deals into a lot of the bond indices.Previously, sukuk issues were not included inthe EMBI, for example, but now they are. In-donesia’s recent sukuk was the first that wasissued on a primary basis that acceded into theindex. If you look at the five year tranches, thespreads of the conventional and sukuk are flat.

Pakpahan, Republic of Indonesia: From the sup-ply side the government of Indonesia has showna persistence in continuously supplying sukukboth in local currency and in dollars. Sukuk nowmake up 29% of our total issuance.

GlobalMarkets: Do you expect yields to carryon falling in Indonesia, Robert?

Pakpahan, Republic of Indonesia: I hope and Iwant them to fall because one of the assignmentsgiven to me by the minister of finance was to lowerour cost of financing! If we look at the economic

fundamentals of Indonesia I think theyield should continue to come downfor our issues, both for local currencyand US dollars.

Economic growth is consistentlystable and high, but the most impor-tant number is inflation which hasdeclined dramatically since 2014. Itis now slightly above 3%, whichmeans now we have the right to askfor cheaper funding.

Gwak, Standard Chartered: Infla-tion and stability of the FX are con-tributing factors to a slow decline inyields. This begs the question ofwhether falling yields will put offsome investors who are just chasingyield. But declining yields is a globaltrend so it’s all relative.

GlobalMarkets: Is Indonesia in that sweet spot where the ratings are good but the yieldsperhaps slightly richer than similar credits?

Rumantir, Mandiri Sekuritas: At the end of theday, investors will calculate their risk-returnanalysis with other EMs. If we compare Indone-sia with other EM local currency bonds, Indone-sia’s government bond yields have fallen on av-erage 80bp year to date. The 10 year nominalyield and the real yield, by which we mean thenominal yield minus the inflation rate, for In-donesian government bonds are still very at-tractive, as Robert was mentioning. It ranks ap-proximately number five — the same as lastyear compared to other EMs in both nominaland real terms. Moreover, the rupiah is current-ly one of the most stable EM currencies year todate. So there is merit for the government toask for a bit more tightening or compression.

GlobalMarkets: But will much lower yieldsdrive SOEs into the market? It’s not so much ademand problem, more of a supply one — youdon’t necessarily need to borrow money at themoment.

Moedak, Pelindo III: Yes, it comes back to theneeds and at present, despite excellent borrow-ing conditions, we have no real foreign currencyborrowing need.

Gwak, Standard Chartered: One of the thingswe could see, for example, in the domestic bondmarkets is that as yields drop and people getmore comfortable with the sovereign as a credit,then more foreign investors come into the localcurrency bond markets for corporates, includingthe SOEs. Basically going down the value chain,so to speak. It would be very positive if we, forexample, saw more foreign investors coming intoa Pelindo domestic currency deal. Those aresome of the things that we have yet to see, butif that happens, it would be very encouragingand would be one of the results of a very sharpor constant depression of yields.

GlobalMarkets: Orias,as a domestic issuer ofrupiah bonds would youlike to see foreign in-vestors in your domesticdeals? Would you care?

Moedak, Pelindo III:I think we just careabout the money… butforeign investors com-ing in would be a goodthing — it could createprice tension. We are is-suing bonds actuallythis year, we are aimingfor Rph5tr in the domes-tic market. So foreign in-vestors are most wel-come!

GlobalMarkets: Infrastructure finance is sucha crucial issue for Indonesia, given the amountof investment required. How can we get thebond market involved?

Pakpahan, Republic of Indonesia: We will soonsee an increasing number of SOEs and corpo-rates issuing bonds because the infrastructureprojects are now beginning to be started. In ad-dition, we have the public-private partnershipprojects, which I also oversee. These are the non-budget infrastructure projects. Last year 16 PPPprojects were signed. Six of them have alreadyreached financial close. These include electricity,water, toll road and fibre optic PPPs. In thepipeline, there are 21 PPPs for this year. So thecombination of the SOEs and corporates and thePPPs will create huge amounts of supply in thebond markets.

Gwak, Standard Chartered: The model of re-cycling of capital for infrastructure projects issomething we hope to see more of going for-ward. Project bonds are certainly somethingthat from an Asean Forum perspective is an im-portant part of the agenda. We believe that in-vestors looking for very long term investmentswould find it very attractive, especially becauseof the asset base that it has.

Rumantir, Mandiri Sekuritas: OJK [Indone-sia’s Financial Services Authority] last yearintroduced a rule to allow pension funds andinsurance companies to invest in SOE corpo-rate bonds to fulfill at maximum half of the30% requirement for government bonds. Soout of the 30% requirement 50% of that theycan invest in SOE bonds. Now clearly this willhelp the SOE segment. Year to date, there isapproximately Rph3.3tr of SOE infrastructure-related bond issuances and all of this has beenoversubscribed and coupons have been rela-tively attractive. So I think the government isactively reviewing its policies to boost domes-tic participation in infrastructure and longdated instruments. GM

SUSIWIJONO MOEGIARSOINDONESIA EXIMBANK

Indonesia Roundtable ¬ 17ADB EDITION FRIDAY MAY 5, 2017 GLOBALMARKETS

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