Beating banks: Indonesia’s non-bank institutions to buy most government bonds

Rising incomes, urbanisation, development of the Islamic finance sector and infrastructure spending needs are expected to drive the rapid expansion of Indonesia’s non-bank financial institutions (NBFIs).

NBFIs are the second-largest domestic investor in the government bond market. The fall in government bond yields in recent years has curbed demand and government bond ownership will not grow significantly in the near term, in our view.

In the longer term, buoyed by high asset growth, we expect NBFIs to overtake banks as the largest domestic buyer of government bonds, absorbing 30-35% of the projected supply between now and 2016. NBFI growth is necessary for the development of the bond market.

As NBFIs diversify their investment portfolios, demand for alternative onshore and offshore assets is likely to pick up. Assuming a 15-20% investment allocation to offshore assets, Indonesia’s NBFIs will be looking to invest USD 75bn abroad in 2020.

Initially, this is likely to be concentrated in high-grade (HG) assets, but could shift to high-yield (HY) over time as local fund managers become more familiar with the overseas environment.