Apr 19, 2016

ASEAN - Defaults, Autocrats No Barrier to $12 Billion Asean Bond Splurge

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A military regime delaying elections, haircuts for foreign investors using local courts and a prime minister fighting a financial scandal are among risks funds are looking past as they pile into Southeast Asian debt.

Foreigners have pumped $12 billion into Thai, Indonesian and Malaysian notes this year, more than twice as much as in 2015.

Thailand, where Prime Minister Prayuth Chan-Ocha hasn’t set a date for a vote two years after taking power in a coup, has lured the most inflows. Indonesia has reaped rewards from easing inflation, despite losses for foreign investors in two high-profile defaults. In Malaysia, a rebound in oil has offset concern over global probes into an investment company whose chief adviser is Prime Minister Najib Razak.

“Investors are taking the view that unless an event will completely derail a country’s reform process and undermine the economic growth outlook, it is not justified to reverse a long-term investment decision,” said Anders Faergemann, a London-based senior portfolio manager at PineBridge Investments, which oversees more than $84 billion. “This shows a new sophistication and understanding of domestic issues by foreign investors.”

Southeast Asia has benefited from the Federal Reserve’s go-slow approach to raising interest rates, a stabilization of China’s economy and a recovery in commodity prices. The International Monetary Fund last week maintained its growth forecasts for the big five Asean economies, while cutting global projections. The Asian Development Bank says the region’s expansion prospects and 600-million plus population make it the next “growth play.”

Thailand, Indonesia

Thai Prime Minister Prayuth had targeted holding an election in late 2015 but pushed that back to mid-2017. Thailand will hold a referendum on a new constitution in August after the junta rejected a draft charter in September. Many investors viewed the military coup as necessary to restore stability after a “precarious political situation,” said Faergemann.

Overseas investors bought a net $5.2 billion of baht sovereign and corporate securities this year, according to data from the Thai Bond Market Association. While the Bank of Thailand cut its benchmark rate twice last year, to 1.5 percent, economic growth hasn’t exceeded 3 percent, supporting the debt market as lenders park excess cash there.

Foreign funds have pumped a net $4.7 billion into Indonesian government securities in 2016, Finance Ministry figures show, as inflation below 5 percent allowed three interest-rate cuts in 2016. While flow data for company notes aren’t available, a JPMorgan Chase & Co. index of dollar-denominated corporate paper show the average yield has fallen 38 basis points this year to 5.5 percent.

Some bondholders of PT Trikomsel Oke said they were disappointed with an Indonesia court decision that rejected their claims after the phone retailer’s 2015 default. This month, a Jakarta judge excluded Standard Chartered Plc from a creditor list and raised questions about the validity of its claims to recoup a $1 billion loan made to coal miner PT Borneo Lumbung Energi & Metal, according to a Reuters report.

IMDB, Najib

Overseas investors bought a net $2.3 billion of Malaysian government and corporate notes in the first three months of this year, official data show. While local authorities cleared Prime Minister Najib this year over what they said was a $681 million donation from the Saudi Arabian royal family, regulators from Switzerland to Singapore are investigating allegations state-owned investment company 1Malaysia Development Bhd. was used to funnel money to individuals including the premier. Najib and IMDB have denied any wrongdoing.

1MDB’s dollar bond prices slumped on Monday to the lowest since November after an Abu Dhabi sovereign wealth fund said the company and the Malaysian finance ministry have defaulted on terms of a binding agreement including a payment of more than $1 billion. The notes traded at 83 cents on the dollar on Tuesday to yield 7.62 percent, compared with less than 6 percent last week, according to Bloomberg-compiled prices.

The dispute with the Abu Dhabi fund puts the progress of the state investment company’s debt restructuring efforts in doubt, Christian de Guzman, a Singapore-based senior analyst at Moody’s Investors Service, said on Tuesday in response to questions from Bloomberg.

1MDB sees an “amicable resolution” to the dispute, President Arul Kanda said Tuesday in an interview with Bloomberg Television. The Malaysian fund is in a ‘‘very stable position,” he said.

Around a fifth of Malaysian government revenue comes from sources related to oil, which has rebounded from a 12-year low. Demand has also been bolstered by 1MDB selling assets.

Supportive Environment

“The risk premia has reduced in 2016 as 1MDB monetized assets and risk sentiment turned for the better supported by a stabilization in the oil price,” said Jens Nystedt, a New York-based managing director at Morgan Stanley Investment Management, which oversees $406 billion.

Regional political considerations for Southeast Asian bonds have been factored in and the global environment is supportive, said Valentina Chen, a Zurich-based senior portfolio manager at Vontobel Asset Management, which oversaw $95.7 billion as of December 2015.

“As long as the Fed stays dovish and we don’t see any deterioration in emerging-market Asia fundamentals, we expect the inflows to continue,” she said.

Y-Sing Liau

Business & Investment Opportunities 

Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. 

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