Government Cuts Planned Debt Issue By 26%
Indonesia will cut its remaining 2010 debt issue by 26 percent, including scaling back a global sukuk, or Islamic bond, offering after lowering its deficit forecast in light of expected faster growth and stronger revenue. The move to trim Rp 15 trillion ($1.7 billion) off the Rp 58 trillion worth of debt still to be issued spurred longer-dated bond prices as investors bet the deficit cut could lead to a much-sought-after investment-grade credit rating.
Foreigners have bought a record amount of Indonesian bonds this year, drawn by the country’s robust economic growth, hopes of a credit upgrade and expectations that the rupiah will continue to appreciate. The government had a budget surplus in the first half, so it would be reluctant to push a huge global issue this year. The government has raised about Rp 120 trillion in bonds this year, or two-thirds of its original target of Rp 178 trillion.
Its higher-yielding local currency sukuk has seen less demand than conventional bonds, with the Finance Ministry again raising less-than-targeted in an auction on Tuesday because of fears the sukuk market lacks liquidity. The global sukuk will be downsized because up to now the government has still booked a budget surplus. Indonesia has cut its financing by about Rp 37 trillion ($4.1 billion) this year — a cut of 28 percent, including the debt issuance cut — because the government now expects a budget deficit of just 1.5 percent of GDP, versus an earlier projection of 2.1 percent. The cut is equivalent to 3.3 percent of its planned expenditure.
The yield premium on Indonesia’s sovereign sukuk over non-Islamic bonds is down 70 percent since the bonds were sold in April 2009, while Malaysia’s debt rallied to a record as investors gain confidence in the securities. The difference in yield between Indonesia’s 8.8 percent Islamic debt due April 2014 and notes maturing the same year that don’t adhere to the religion’s ban on interest narrowed to 26 basis points from 87 at the time of issue, according to prices from the Royal Bank of Scotland Group.
The failure of 10 rupiah-denominated sukuk auctions this year has prompted the Finance Ministry to revive demand for its Islamic debt by tapping international investors and changing its sales practices. Indonesia has raised Rp 4.9 trillion ($540 million) from notes that comply with Islam’s ban on interest so far this year, down 40 percent from a year earlier, according to the ministry’s Debt Management Office. The next auction is seeking Rp 1 trillion. 
Indonesian government sold Rp 246 billion ($27 million) of Islamic bonds on Tuesday, not even close to the Rp 1 trillion rupiah target. The government sold Rp 239 billion of 10.25 percent sukuk , or Islamic bonds, due in March 2030 to yield 9.94 percent, as well as Rp 7 billion of 10.25 percent notes maturing in January 2025 carrying a yield of 9.28 percent. Investors submitted bids totaling Rp 1.18 trillion for the notes on offer. The sale was a failure, however, because bidders demanded yields much higher than the benchmark. Investors sought returns as high as 10.75 percent for the notes due in 2030, and 10.84 percent for the securities due in 2025, according to the statement. 
State-owned bank PT Bank Negara Indonesia (BNI) has separated its sharia banking unit into an independent entity named PT Bank BNI Syariah, which officially commenced operation on June 17,2010.
Indonesian government may offer tax incentives for Shariah bond issues and bank deposits to better compete with Malaysia, the world’s top Islamic finance market, the central bank official said on Tuesday. One sweetener being considered would help boost bank capital and another could provide a tax holiday for sukuk (Islamic bond) issues. The country has already removed double taxation on Islamic finance transactions to give the industry a level playing field with conventional banking, but new policy was needed.
