Economics Markets Strategy - the DBS Vickers Securities Equities ...

Yield
Economics – Markets – Strategy
With 10Y IDR yields
in the 12-13%
range, we think
government bonds
are a buy
Indonesia: Sell-off is over
With the Indonesian government having raised the price of subsidised fuel by
an average 28.7% in May, market attention is now fixated on the question of
whether this is enough to save the budget from collapsing under the weight of
growing subsidy bills. We reckon it is not, if the price of oil averages more than
$115/barrel in 2H08 (see economics section for details).
Bond investors seem to be sceptical too, judging by the fact that 10Y yields
have entered the 12-13% range, within which the policy rate peaked in 2006,
when the government lifted fuel prices by 126% (Charts 21 & 22). Now, after
the sell-off, there is value at current levels. We don’t expect yields to rise much
above current levels, even if international oil prices rise further and the Indonesian
government is forced to adjust subsidies a second time.
Hence, we think long-end Indonesian Government bonds are a buy. We expect
yields to fall in 2H08 and the curve to steepen, as policy rates are unlikely to
rise to 13% again. We currently think that Bank Indonesia will lift rates to only
9.25% in the coming months and hold at that rate well into 2009.
That said, as the currency outlook is deteriorating with Fed rate hikes likely in
4Q08 and 2009 (see currency section for details), we think that there is the risk
that Indonesian government bonds fail to rally and actually come under fresh
upward pressure.
Chart 21: 10Y IDgov Yield vs Policy Rate
%pa
Chart 22: 2Y IDgov, 10Y IDgov & Spread
%pa
14
bps
400
15
13
12
2/10 Spread (RHS)
2Y IDgov Yield
10Y IDgov Yield
350
300
250
11
10
200
9
7
10Y IDgov Yield
1M SBI
5
Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08
8
6
Nov-06 Feb-07May-07Aug-07Nov-07 Feb-08May-08
150
100
50
0
The Philippines: Rate hikes on the horizon
Bangko Sentral ng Pilipinas on June 5 lifted its policy rates by 25bps, citing
indications that supply-driven inflationary pressures are beginning to feed into
demand. Policy makers are seeing early evidence of second-round effects and
the need to act promptly to rein in inflationary expectations.
Headline CPI inflation in May was up 9.6%YoY, continuing to threaten the BSP’s
inflation targets for 2008 and 2009, which stand at 7.0-9.0% and 4.0-6.0%, respectively.
Rate hike concerns are justified given that headline CPI inflation has risen to
8.3%YoY in April, but we don’t think an aggressive tightening cycle lies ahead
(Chart 23). Real GDP has slowed sharply in 1Q08 to 5.2%YoY from 6.4%YoY in
4Q07 as the economy expanded at only 0.8%QoQ sa in 1Q08. That is among the
slowest since 2001.
50