Asia’s Highest Yielder Is Losing Appeal Relative to South Africa

LAGOS (Capital Markets in Africa) – Having the highest inflation-adjusted yield in Asia isn’t enough for emerging-market bond investors any more.

That’s the message from Saxo Bank A/S, which says Indonesia is losing its appeal over countries such as South Africa because of better prospects for political stability and reforms.

The rupiah slumped to a two-year low this month despite offering the highest inflation-adjusted yield in Asia and after having been upgraded in recent months by ratings companies. By contrast, South Africa’s rand rose to a three-year high last month after Cyril Ramaphosa won the control of ruling party in December and later succeeded Jacob Zuma as the nation’s president.

“The market does not like Indonesian assets relative to assets elsewhere, a bit of a warning sign for the currency, ” John Hardy, head of FX strategy at Saxo Bank, wrote in a note. “This could merely be a market that feels greater opportunities are available elsewhere — for example in South Africa, where there has been a dramatic shift in investor sentiment.”

Both ranked by Moody’s Investors Service at Baa3, the lowest investment-grade rating, the premium of South Africa’s five-year credit default swaps are now near their tightest over Indonesia’s in more than a year.

Local and dollar-denominated bonds of South Africa are also offering more attractive yields than Indonesia’s. South Africa’s 9-year bond yields 8.07 percent compared with Indonesia’s 10-year yield at 6.79 percent. Its 10-yeardollar bond has a rate of 5.07 percent versus 4.17 percent for the Southeast Asian nation.

With local and regional elections coming up in June in Indonesia and a presidential election to follow next year, investors could be worried that populist measures aimed at the election cycle may widen the fiscal deficit, Hardy wrote. Already, Indonesia’s decision to freeze power and fuel prices until next year has prompted Moody’s to hint those actions could hurt the country’s credit rating.

Source: Bloomberg Business News