By Lilian Karunungan Dec. 10 (Bloomberg) -- The 31 percent drop in Indonesia’s international bonds is proving irresistible to Fortis Investments betting that the biggest economy in Southeast Asia will avoid a default. “Valuations are attractive,” said Ernesto Bettoni, who helps oversee the equivalent of $266 billion as a London-based investment specialist at Fortis, a unit of the Belgian financial services company. “We don’t expect a default in Indonesia.” Indonesia’s more than $50 billion of foreign-currency reserves are sufficient to cover short-term obligations, even after falling 12 percent since the end of September, Bettoni said in an interview yesterday. President Susilo Bambang Yudhoyono can shore up finances through loans from Australia and members of the Association of Southeast Asian Nations, he said. The government’s dollar-denominated bonds have lost 31 percent this year, according to indexes compiled by HSBC Holdings Plc, as slowing global economic growth and the seizure of credit markets drove investors away from emerging-market securities. Only Pakistan’s debt has performed worse among the 11 Asian dollar indexes compiled by HSBC, dropping 51 percent. Indonesia’s 6.875 percent dollar bond maturing in January 2018 yielded 11.14 percent today in Jakarta, almost twice as much as when the security was issued in January, according to data compiled by Bloomberg. The price has rebounded to 76 cents on the dollar, from as low as 54.50 cents on Oct 24. The benchmark Jakarta Composite stock index is down 52 percent this year, while the rupiah has lost 14 percent. Moody’s Rating The world’s most populous Muslim nation had to seek $25 billion in funds from the Washington-based International Monetary Fund between 1997 and 2003 to help rescue its banking system as Asian currencies tumbled. The government has had to reorganize its borrowing plans again this year after the Sept. 15 failure of Lehman Brothers Holdings Inc. shut off access to foreign-currency debt market funding for most developing nations. “Indonesia is not going to face this sort of financial collapse that they experienced during the 1997-1998 crisis,” said David Cohen, director of Asian forecasting at Action Economics in Singapore. “They have not faced the need to approach the IMF this time.” Foreign Debt Indonesia’s short-term foreign-currency and rupiah- denominated debt is rated B by Standard & Poor’s, five levels below investment grade. The country had $147 billion in external debt outstanding as of the third quarter, according to Bank Indonesia in Jakarta. Indonesia lowered its economic-growth forecast for next year to 4.5 percent, as a worldwide recession saps demand for the nation’s exports, Finance Minister Sri Mulyani Indrawati said Dec. 2. The government expects the economy to expand 6.1 percent in 2008. “Next year, we will see the dollar come back in full force again” and weaken Asian currencies, said Joseph Tan, Asian chief economist at Credit Suisse Group in Singapore. “Jobs are still being lost, growth is still being revised down.” The rupiah may weaken to 12,000 by March, according to the median estimate of 21 analysts and strategists in a Bloomberg News survey. The rupiah was little changed at 10,925, near the highest level in more than a month, as of 3:39 p.m. in Jakarta. Credit Quality Moody’s Investors Service said on Dec. 2 that Indonesia’s rating of Ba3, three levels below investment grade, is stable, while warning the global financial crisis may erode sovereign credit quality more than anticipated. The government plans to borrow $2.8 billion from the World Bank and other multilateral lenders to help finance the 2009 budget deficit, Sri Mulyani said on Dec. 5. Assuming a “worst case scenario” of reserves being wiped out, Indonesia “could potentially access $13 billion to $18 billion from combining IMF funds and swap lines with ASEAN and Australia,” Bettoni said. Reserves dropped to $50.18 billion in the first week of December from $57.11 billion in September as Bank Indonesia sold foreign exchange to stem declines in the rupiah. Foreign ownership of the country’s local bonds slumped to 87 trillion rupiah ($7.97 billion) as of Dec. 5 from a peak of 106.66 trillion rupiah in August, data on the Finance Ministry’s Web site showed. Indonesia’s international debt accounted for 4.2 percent of Fortis’s emerging-market dollar bond portfolio. Indonesia credit-default swaps, which decline as perceptions of credit quality improve, fell 49 basis points to 727 basis points yesterday, according to data compiled by Bloomberg. The cost to protect $10 million of the government’s debt from default for five years is equivalent to $727,000 annually. President Yudhoyono will strive to avoid any default because of the “high political cost,” Bettoni said. To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

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