India and Indonesia are often seen as the weakest links of the major Asian countries in terms of fundamentals. Both countries experienced deteriorating current account and fiscal balances last year, which was exacerbated by the impact of QE¹ tapering.
As a result, the Indian rupee lost 11 per cent against the US dollar in 2013 while the Indonesian rupiah declined by 19.5 per cent. Both currencies have yet to recover from these losses, and both remain down by more than 8 per cent during the past 12 months. The Indonesian local bond market also suffered from significant capital outflows last year — down 13 per cent in IDR² terms — given large foreign holdings of local sovereign bonds.
Given improvements in valuations and some potential turnaround signs ahead, we are turning more positive on the sovereign bonds and currencies of both India and Indonesia. This is due to proactive measures taken by both the Indian and Indonesian authorities that have supported recent improvements in their current account balances. In India’s recent national election, the favoured Bharatiya Janata Party won 282 out of 543 seats, achieving the first single-party majority in 30 years. This bodes well for the ability of the Indian government to put through the necessary reforms that are supportive of growth.
While GDP³ growth has weakened from the heady 6-plus per cent levels in 2011, it remains positive in the range of 4.5 to 5.5 per cent. India and Indonesia have investment-grade sovereign ratings by Moody’s and Fitch, and attractive two-year yields of 8.6 per cent and 7.3 per cent, respectively. While the high yields are partly a consequence of high inflation, we are comfortable with the recent measures of the central banks in managing inflation.
So with the year-to-date rally in government bond yields in PIGS4
economies — which still suffer from structurally weak growth prospects, high unemployment and still-large government deficits — we believe India and Indonesia sovereign bonds are an interesting alternative opportunity that offers attractive carry and currency appreciation potential.
Comparing Forex and Sovereign Debt
of India and Indonesia vs. PIGS
||Sovereign Long-Term Foreign Currency Rating
(30 Apr 2014)
|10-Year Bond Yield
(30 Apr 2014)
|YTD Change in 10-Year Yields
(bps; 30 Apr 2014)
|2-Year Bond Yield
(30 April 2014)
(YOY; 31 Dec 2013)
|Current Account Balance
(% of GDP; 31 Dec 2013)
Source: Bloomberg, Allianz Global Investors. Past performance is no guarantee of future results.