Powerlines1305

Indonesia’s 10-year government bond yield has reached 7.7%, its highest level in several years, while the rupiah continues to face substantial depreciation pressure. I have repeatedly warned that Indonesia’s problems would not remain confined to the equity market, and we are now seeing increasing signs of stress spreading into the sovereign bond market. The implications are significant because sovereign yields serve as the benchmark for borrowing costs throughout the economy. When the government itself must offer 7.7% to attract investors for 10-year rupiah debt, corporations generally face an even higher cost of funding, particularly those with weaker balance sheets, substantial refinancing requirements or significant exposure to domestic consumption. For the government, higher yields translate into more expensive refinancing and additional interest expenses on newly issued debt, gradually reducing fiscal flexibility at precisely the time when elevated oil prices, subsidy requirements and ambitious spending commitments are already putting pressure on the budget. This does not mean the entire outstanding debt stock is immediately repriced, but the longer yields remain elevated, the greater the cumulative fiscal burden becomes. For banks, the implications are equally concerning because rising government bond yields can generate mark-to-market losses on securities portfolios, tighten financial conditions and eventually weaken borrowers’ debt-servicing capacity. While banks with strong deposit franchises may initially benefit from asset repricing, sustained pressure on funding costs and household purchasing power could eventually translate into weaker credit demand, deteriorating asset quality and higher credit costs. For equities, the valuation implications are particularly unfavorable. Higher sovereign yields increase the risk-free component of the cost of equity, while concerns about currency stability, governance and market investability can simultaneously increase the equity risk premium. This creates a potentially powerful valuation compression mechanism, particularly for companies whose earnings are already vulnerable to weaker consumption, higher financing costs and slowing economic activity. Consider a simplified example. A company generating Rp100 billion in sustainable annual cash flow would theoretically be worth Rp1.25 trillion at an 8% required return under a zero-growth perpetuity assumption. Increase that required return to 10%, and its valuation falls to Rp1 trillion, representing a 20% decline without any deterioration in underlying cash flow. Now imagine what happens when the required return rises while earnings expectations are simultaneously revised downward. The more troubling development is the potential feedback loop between the rupiah and sovereign yields. Currency depreciation increases foreign investors’ expected exchange-rate losses, prompting them to demand higher local-currency yields. Higher yields depress bond prices and can encourage additional portfolio outflows, creating further pressure on the rupiah. This also puts Bank Indonesia in an increasingly difficult position. Raising policy rates could help stabilize the currency and restore confidence, but would also tighten domestic financial conditions and potentially weaken growth. Refusing to tighten, however, risks allowing currency depreciation and inflation expectations to become more entrenched, which could ultimately force the bond market to demand an even higher risk premium. And this is precisely why I remain bearish on Indonesian equities. We are looking at a market confronting higher global discount rates, a weakening currency, expensive oil, rising sovereign borrowing costs, potential pressure on bank asset quality, weaker household purchasing power and unresolved questions surrounding market integrity and MSCI investability. The equity market does not operate independently of the bond market. When sovereign yields rise because investors demand greater compensation for risk, equity valuations cannot remain immune. At 7.7%, Indonesia’s 10-year yield is sending a warning that policymakers and equity investors should take seriously. We maintain our negative stance on Indonesian equities.

I just dialed into a call hosted by a local securities house with representatives from OJK and BEI. Judging from their statements and the overall tone of the discussion, I came away with the impression that regulators may be preparing to pursue criminal proceedings against parties potentially involved in the DSSA, BREN and CUAN cases, possibly including securities firms that facilitated the transactions. To be clear, this is my interpretation of the discussion, not confirmation that criminal charges have been filed. If the authorities genuinely intend to pursue criminal accountability, including against the ultimate beneficiaries and any intermediaries that knowingly facilitated wrongdoing, this could represent a meaningful turning point for Indonesia’s capital market. But I remain skeptical. Will enforcement reach the people who actually orchestrated and benefited from any misconduct, or will a handful of individuals lower down the chain simply be sacrificed as scapegoats while the real beneficiaries walk away untouched? The distinction matters enormously because prosecuting a few individuals is not the same as dismantling the structures that allow market manipulation to flourish. I would welcome serious enforcement, but the credibility of this exercise will ultimately depend on who gets investigated, who gets prosecuted and whether the authorities are willing to follow the evidence regardless of how politically or financially connected the parties may be. Too good to be true? I certainly hope not. But I’ll believe it when I see it.