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FINANCE AND DEVELOPMENT
INDONESIA’S CORPORATE
BOND SECTOR: SMALL
BUT GROWING Updated: June, 2005
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§
Indonesia’s
corporate bond sector is small but growing, more than doubling
the number of issuances in the last two years.
§
The Surabaya Stock
Exchange is the primary listing agency for corporate bonds in
Indonesia, with 107 corporate bond issuers and 260 issuances as
of May 2005. §
The total value of
corporate bonds is about US$ 6.3 billion, most of which are
concentrated in the banking and financial sector.
§
Two thirds of
corporate bonds are held by domestic mutual funds and pension
funds. §
The secondary market
is thin with too few investors and issuers.
§
There is not yet any
widely available pricing system for corporate bonds, though two
organizations may establish them in the next 6-12 months.
§
Of Indonesia’s two
rating agencies, Pefindo and Kasnic, Pefindo dominates in
domestic corporate bond ratings. |
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Small But Growing Sector
Source:
Surabaya Stock Exchange
Indonesia's corporate bond market is small but growing. Both corporate and government bonds list on the Surabaya Stock Exchange (SSX). The Surabaya Stock Exchange started in 1989 as a regional stock exchange to support the development of East Java and eastern parts of Indonesia. It currently lists about 206 stocks and is the predominant agency listing both corporate and government bonds in Indonesia. The following charts show the movement of outstanding corporate bonds from 1989 to April 2005 and trading activity from 2002 to April 2005.
Chart 1: Outstanding Corporate Bonds
SSX has about 80% of its an operational activities in Jakarta, while its head office in Surabaya (East Java) mainly functions as a supporting office for information and as a training center. SSX has offered an over-the-counter fixed income service (OTC-FIS) to facilitate bond transactions since 1997. (More information can be found at www.bes.co.id.) To be listed on SSX, corporate bonds must be investment grade per Indonesia's Kasnic or Pefindo Ratings and have a minimum issuance valued at Rp. 50 billion (US$ 5.2 million). A ratings downgrade below investment grade could lead to delisting. A company must also show three years of financial statements and have good growth prospects. For bonds below investment grade, SSX may help facilitate private placements.
The following table shows the increase in activity in this very young market, with the number of issuances more than doubling in two years. As of May 2005, SSX reported 107 corporate bond issuers with 260 issuances, with an outstanding value of Rp. 59.2 trillion (US$ 6.3 billion). State-owned, public and private companies issue straight, syariah (Islamic bonds that pay profit-sharing rather than interest), and convertible bonds with a one-to-ten year maturity. Commercial paper (corporate bonds with a maturity of less than one year) is still very new to Indonesia, just starting in 2004. The following tables show the growth of corporate bonds in Indonesia.
Table 1 & 2: Corporate Bond Activity
|
ear |
2002 |
2003 |
2004 |
|
Issuances |
111 |
180 |
243 |
|
Issuers |
55 |
95 |
107 |
Indonesia’s corporate bonds are concentrated most heavily in the banking and financial sector, about 37% total. Banks tend to issue subordinated rather than senior debt. The following table shows Indonesia’s corporate bonds by sector as of April 2005.
Chart 3: Corporate Bonds by Sector (as of
April 2005) 
Source: Surabaya Stock Exchange
Several companies postponed planned bond issuances in March-April 2005 after recent market volatility. Only one company, toll road contractor Citra Marga Nusaphala Persada (CMNP) actually issued a bond in the first quarter of 2005 (Rp. 400 billion or US$ 42 million, with 3 – 5 year maturity). Bank Tabungan Negara postponed Rp. 750 billion (US$ 80 million) of bonds and Rp. 250 billion (US$ 26 million) of subordinated debt, and Bank NISP stated it is waiting for better market conditions to issue Rp. 750 billion (US$ 77 million) of bonds. Bank Danamon Indonesia postponed a Rp. 2.5 trillion (US$ 260 million) bond issuance, and Bank Internasional Indonesia (BII) and Bank Niaga postponed US$ 200 million and US$ 100 million of subordinated debt respectively.
Mutual funds and pension funds are the largest holders of Indonesian corporate bonds, with individuals holding less than one percent. The following table shows the ownership profile of Indonesia’s corporate bonds (outstanding value of USD 6.3 billion as of May 2005). The state-owned pension firms Jamsostek under Ministry of Labor (with Rp. 26 trillion or US$ 2.7 billion of assets in 2003) and Taspen under Ministry of Finance (with Rp. 12 trillion or US$ 1.4 billion of assets in 2003) are the largest pension and social security funds in Indonesia.
Chart 4: Corporate Bonds Ownership Profile (as of April 2005)
Source: Surabaya Stock Exchange
Secondary
Market Development
The three largest securities firms in Indonesia are Bank Mandiri’s subsidiary Mandiri Sekuritas (Rp 1.4 trillion or USD 150 million of assets), the private firm Trimegah Securities (Rp. 787 billion or US$ 83 million of assets), and state-owned Danareksa Securities (Rp. 741 billion or US$ 78 million of assets). Secondary trading has been thin, with no efficient mechanism for obtaining bid-ask prices. The Inter Dealer Market Association (IDMA) was set up in March 2003. Its members consist of 14 domestic banks, six foreign banks and four securities companies.
IDMA’s goal is to make Indonesia’s secondary bond market more liquid by facilitating price information. IDMA’s members act as a “de facto” primary dealers market, since Bank Indonesia has not designated any official primary dealers. Currently IDMA mainly handles the pricing of government securities. Indonesia’s Capital Markets Supervisory Agency (BAPEPAM) implemented a regulation in January requiring mutual fund managers to use IDMA’s reference price for government bonds held by their funds.
Indonesia has two very nascent systems for quoting bond prices: an IDMA system for government bonds and a not-yet-launched system by SSX for corporate bonds. With only two players in this very thin market, it is not yet clear how they will compete or cooperate.
IDMA: IDMA uses the Bloomberg system for price discovery and electronic reporting of trading in government bonds. Currently, IDMA receives prices for trades that occurred throughout the day at 4:00 p.m. IDMA hopes to move to real time bond trading (reporting within 5-10 minutes of a trade) later in 2005. Price information is available on the IDMA page of Bloomberg. It is not clear if/when IDMA will provide corporate bond prices.
SSX: For government bonds, SSX runs two systems. Its over-the-counter, fixed-income service (OTC-FIS) provides quotations for bond transactions and is used by 16 banks and 4 securities companies. SSX’s trading system, the Indonesian Government Securities Trading System (IGSTS) was launched in 2003 for government bonds between members of the Association of Government Securities Dealers. This system is apparently not widely used, reporting only 5-25% of transactions. For corporate bonds, SSX plans to roll out a new Fixed Income Trading System (FITS) in July 2005, to provide real-time, online bid-ask prices.
Pefindo is Indonesia’s largest rating agency, established in 1994 through the initiative of BAPEPAM and Bank Indonesia. Pefindo is a private limited liability company owned by 100 domestic shareholders including pension funds, banks, insurers, securities companies and the Jakarta and Surabaya Exchanges. Pefindo is an affiliate of Standard & Poor’s and adapts Standard & Poor’s methodology in its rating process. About 60 % of its business is rating domestic investment grade corporate bonds, and it also publishes credit opinions on corporate bond issuers. Pefindo recently started to incorporate good governance as a sub-element of its rating methodology. (Note: More about Pefindo and its methodology can be found at www.pefindo.com.) Indonesia’s only other rating agency is Kasnic Credit Rating Indonesia, incorporated in 1998. Kasnic is affiliated with Fitch Ratings through its shareholder Duff and Phelps. (See www.kasnicrating.com for more information.) Kasnic’s focus includes asset-backed securities including plans for securitized mortgages, which are not yet developed in Indonesia. Kasnic also rates small banks and some corporate bonds.
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