Throughout 2022, Several Negative Catalysts Made Indonesia’s Credit Default Swap Rate Even Worse


Indonesia’s credit default swap rate continues to increase throughout 2022. Several negative catalysts from the international community contributed to influencing the level of the credit default swap, one of which was the Russia-Ukraine geopolitical conflict.

Based on scattered data, Indonesia’s 5-year credit default swap (CDS) as of March 9, 2022, is at the level of 124.61. The position indicates a 2.08 percent probability of default or default.

Throughout the current year, Indonesia’s 5-year CDS was observed to move upward, although it was at the lowest level in 2022 at around 72.91 in January. the rest, Indonesia’s 5-year CDS level is in the range of 72.91-124.61.

Indonesia’s 5-year CDS rate is currently recorded to have weakened by 34.85 percent over the past month. However, the current CDS level is still better than the March 2020 period when Indonesia’s CDS touched the 239.11 level.

The lower CDS level indicates a lower expectation of investment risk in a country’s debt instruments, in this case for Indonesian bonds denominated in rupiah.

Permata Bank Chief Economist Josua Pardede explained the increase in CDS in the last 2 weeks. He said it was driven by geopolitical tensions in Russia-Ukraine. Since the Russian invasion of Ukraine, the CDS has continued to increase and reached 126.51 on February 7, 2022, the highest since July 2020.

Amid increasing CDS, the rupiah exchange rate is in the range of Rp. 14,330 – Rp. 14,410 since the Russian invasion of Ukraine. This indicates that the exchange rate still tends to be stable.

“The increase in CDS also affected the movement of rupiah bonds, which since the beginning of the invasion experienced an increase in yields of 30 basis points (bps),” he explained, Wednesday (9/3/2022).

Josua continued that the increase in CDS was also influenced by the outflow from the Indonesian bond market, which was recorded at US$556.08 million in March. Since late 2021, the CDS is up 33 bps on the Fed’s hawkish sentiment and escalating geopolitical tensions. The increase in CDS continues and is inevitable in 2022 due to pressure on global sentiment.

However, according to him, the increase in CDS will peak in the first half of 2022. Meanwhile, in semester II/2022, CDS is projected to be lower in line with the fading sentiment.

For information, credit default swaps (CDS) are derivatives or financial contracts that allow investors to “exchange” or offset their credit risk with the risk of other investors.

A credit default swap is designed to transfer the credit exposure of fixed income products between two or more parties

In a credit default swap, the swap buyer makes payments to the swap seller until the contract expiration date.

In return, the seller agrees that if the debt issuer (borrower) defaults or experiences another credit event, the seller will pay the buyer the value of the securities. This includes all interest payments that will be made between that time and the security’s maturity date.

The majority of single-name CDS are traded with the following credit event as a trigger. These include the bankruptcy of the reference entity, failure to pay, accelerated obligations, rejection, and moratorium.

Credit-default swaps have become a very popular way of managing this kind of risk. The US Currency Watch publishes quarterly reports on credit derivatives and a report published in June 2020. This report places the size of the entire market at US$4 T, of which CDS accounts for USD 3.5 T.