Indonesia’s Bond Metrics Suggest Outperformance Against India

Indonesia and India, often looped together because of a welter of economic similarities, face a potentially divergent outlook in 2020 thanks in part to contrasting scope for monetary and fiscal policy stimulus.

While India‘s central bank has pulled its benchmark interest rate down to the lowest level since the aftermath of the global financial crisis, Indonesia’s has yet to fully reverse its monetary tightening of 2018. With a yield premium of about 50 basis points on 10-year local-currency notes, a slightly stronger investment-grade rating, and a more welcoming regulatory structure for foreign inflows, Indonesia has a number of advantages.

Indonesian bonds already pipped India for 2019, with 14% returns for Southeast Asias biggest economy compared with 11% for the South Asian giant as of Dec. 23. Each did better than the Bloomberg Barclays EM local currency index total return of around 8%.

With a government debt-to-gross domestic product ratio at less than half of Indias near-70%, and a smaller deficit, Indonesia has fiscal firepower to boost economic growth without triggering immediate financing concerns. And it enjoys a lower inflation rate, with the advantage projected to extend into 2020.

“I am more cautious on India as the impact of monetary and fiscal policies in support of the economy is less effective at this point,” said Takeshi Yokouchi, a Tokyo-based senior fund manager at Sumitomo Mitsui DS Asset Management Co., which manages about $160 billion. “Indias economy is also likely to remain sluggish.”

One wild card: foreign investors have long been frustrated by caps on investment in Indian bonds, and any move to raise the limit could trigger a rally. The cap could be boosted to at least 10% of outstanding stock, from the current 6%, one local report has suggested.