Investor leap of faith needed for Indonesian ‘kangaroo’ bonds issue

Australian investors have largely spurned federal government attempts to drive investment in Indonesia. But both governments are hoping an Australian-dollar bonds issue will provide a low-risk entry.

Anthony Albanese and Indonesian President Prabowo Subianto ride a golf cart as schoolchildren wave the flags of the two countries at Merdeka Palace in Jakarta in May. Picture: AP

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Indonesia will issue its first-ever Australian dollar “kangaroo” bonds next month in a move both governments have billed as a vote of confidence in the bilateral relationship – one they hope will finally overcome investor wariness in Southeast Asia’s largest economy.

The bond issuance, raising money for the Indonesian government’s multibillion-dollar flagship projects, is the latest in a string of efforts by both countries to boost sluggish Australian investor interest in Indonesia, a country historically avoided by risk-averse domestic superannuation funds and other institutions.

Amid jitters in the US bond market, Indonesia has moved to diversify its fundraising sources.

Indonesian Finance Minister Sri Mulyani Indrawati this week announced the August bonds issue, describing it as a vote of confidence in the Australian economy and a reflection of the two neighbours’ deep bilateral ties.

“This will open up new pathways for Australian investors to find quality investment products, support Indonesia’s growth and strengthen financial integration,” Dr Indrawati wrote in an opinion piece co-authored with Treasurer Jim Chalmers this week.

“It is a practical example of the ambition that underpins our economic partnership and the shared belief that resilience is built through co-operation, reform and openness.”

The two treasurers also flagged an imminent review of the bilateral free-trade agreement to help both nations weather the “major economic disruptions” caused by ongoing conflicts, post-pandemic inflation and the Trump administration’s tariff imposts.

The Albanese government has worked hard to build trade and investment across Southeast Asia through its 2040 investment strategy, particularly so in Indonesia in the belief broader economic engagement will provide ballast to a sometimes volatile bilateral relationship.

Two-way trade between the two countries has doubled to $35bn since 2020 when the Indonesia Australia Comprehensive Economic Partnership Agreement finally came into effect.

Yet Australian investment uptake in Indonesia continues to lag, hampered by concerns over endemic corruption, changing regulatory frameworks and licensing difficulties – despite considerable efforts by the Albanese government to turn that around.

In 2022 the federal government recruited Australian corporate heavyweight Nicholas Moore to draw up an investment blueprint designed to triple investment in the region by 2040, while prominent business figures such as University of Western Sydney chancellor Jennifer Westacott have been appointed investment champions for specific countries.

Deal Teams have also been established across the region to identify opportunities for Australian investors, and so-called Landing Pads set up in Vietnam and Indonesia to provide on-ground support for Australian businesses there.

While government-sponsored investor delegations to Indonesia have drawn enthusiastic participation – including one by Australian super funds in 2022 – there has been little follow-through.

Supporters of the bond issue say it provides a pathway for risk-averse Australian investors to gradually increase their exposure to Indonesia as the first step in what could be a 10- or even 20-year project to build greater understanding of Southeast Asia’s largest economy, an essential precondition to greater investment.

The Indonesian government will start meeting prospective Australian investors in coming weeks alongside joint bond issue lead managers ANZ, Standard Chartered and UBS to try to build investor enthusiasm.

But it could have its work cut out for it if initial market reaction is any guide, amid warnings Indonesia’s low investment grade BBB credit rating could preclude some Australian super funds from holding the bonds.

iPartners bond portfolio manager Andrew Baume told The Australian investor meetings would be critical to building enthusiasm and overcoming market wariness.

“It’s tough because it’s just not the sort of thing a lot of the sovereign investors in Australia would expect to see in an Australian dollar-denominated fund,” he said.

“There might be a public policy argument for that bond to exist but it doesn’t mean investors, bound by a lot of guardrails, can participate.”

With many super funds likely to remain wary, that leaves sovereign funds, such as Australia’s Future Fund, as key investment targets.

But Mr Baume cautions: “Their job is not to help the Australian foreign affairs aspirations, but to maximise returns they think they can get. For them to participate it would be because they have determined it has a superior risk-adjusted return.”