INDONESIA: Indonesia CDS Back to FV

• In Early April we published on Indonesia noting "CDS Just Off Highs, FX Reserves Well Placed Relative To History" as tariffs were being threatened, and the trade war escalating Indonesia's equity market had struggled leading up to the EID break and before the tariff announcement, already down 8% year to date.
• Soon after the BI were vigilant and kept rates on hold at their April meeting.  This spoke to their confidence and seemingly investors got the message thereafter.  Leading up to the April meeting exchange data (via WFII on BBG) showed foreign investors pulling their money in the month prior to the tune of US$1bn of outflows.  In the month since the April meeting the  turnaround has been significant with inflows reaching US$190m.  In that same time the Jakarta Composite has delivered gains of 14%.
• CDS had performed strongly into February with the 5-year touching 67bps in mid-February before widening on equity volatility to be 90bps just prior to the break.  Upon return from the EID break the CDS capitulated to reach 131bps.  At the time of our last post on April 11 the CDS was at 116.  In context, the equity volatility in 2022 saw CDS widen to 161bps and during the height of COVID markets, the 5-year CDS touched 210bps.
• Today, following a very strong period for the equity markets CDS is at +83bps.
• Indonesia's markets are typically one of the more volatile in Southeast Asia with bond volatility linked closely to FX volatility and feeding directly into investor sentiment.  Concerns earlier in the year that the Prabowo government policies were having a severe (negative) impact on the fiscal position were softened this week with news that the fiscal position is stabilizing for now.
• Additionally, the rupiah has gained over 3% in the last month, albeit coinciding with a near US$5bn decline in reserves.
• Yet that has been a point sometimes missed by investors.  The BI today is not the same as before and is much better equipped to manage the currency thanks to the tools they have available to them.
• The rally in CDS has seen the CDS rally by +33bps over the last month.  Indon 5 YR CDS still enjoys a 30bps premium over Malaysia and Thailand.  The Indon / Malay relationship is back to its 3 year average whereas the Indon / Thai relationship is below its 3 year average. 

Source: MNI - Market News/Bloomberg