JAKARTA: Principal Asset Management fund is keeping a close eye on the rupiah after selling most of its Indonesian sovereign bonds, as political instability stirred concern over fiscal policy.
The fund sold Indonesian government debt earlier this month following the appointment of Purbaya Yudhi Sadewa as finance minister, said Howe Chung Wan, Singapore-based head of Asian fixed income, adding that the fund manages US$4.8bil in emerging-market assets.
The rupiah will be the key “release valve” to watch before the fund considers re-entering the market, he said.
Foreign investors have been trimming Indonesian sovereign bond holdings as political uncertainty raises questions about fiscal discipline under President Prabowo Subianto.
The shake-up in his economic team has fuelled concerns over looser spending and a potential shift from long-held budget limits, as Prabowo pushes to lift growth beyond 6%.
The policy risks have weighed on the rupiah, prompting funds such as Principal to pare exposure.
“We sold out when Purbaya came in and announced a more aggressive fiscal plan and yields went lower,” Wan said.
There will be a time to enter the market again, but “foreign exchange (forex) is probably the biggest trigger for us as a whole because it is very hard for you to take unhedged”.
Bonds have since rallied as Bank Indonesia’s unexpected rate cut fuelled bets on a dovish policy turn, driving 10-year yields down for 10 consecutive days, the longest losing streak in over four years.
With the 10-year yield now near 6%, Wan sees limited value once foreign exchange risk is factored in, though he joined economists in expecting more rate cuts, especially if global yields keep falling.
The test will be whether a stable rupiah and steady easing can outweigh investor unease over fiscal policy.
The rupiah has been Asia’s worst-performing currency this year, sliding almost 3% against the US dollar.
Forex reserves have dropped to the lowest in more than a year, piling more pressure on the currency.
Concerns over fiscal discipline and central-bank autonomy have spurred foreign outflows from Indonesia’s bond market this month, Bloomberg-compiled data showed.
With global funds retreating, the government is leaning on domestic investors to help spur demand. — Bloomberg