Sharia Banking and the Financial Industry

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.

Indonesia chose three banks on Tuesday to manage the sale of as much as $650 million in Islamic bonds in October after securing credit ratings upgrades from Standard & Poor’s and Moody’s in the past year as the economy recovered. Investors look at Indonesia favorably and there’s the prospect it will become an investment grade issuer.

S&P upgraded Indonesia’s credit rating to BB in March, two levels below investment grade, while Moody’s raised its ranking in September to Ba2, also two notches below. The yield on Indonesia’s dollar-denominated Islamic notes fell to a record low of 3.44 percent on Wednesday, compared with 8.37 percent at the time of issue, and returned 27 percent since the sale on April 17, 2009, according to RBS prices.

The HSBC/NASDAQ Dubai US Dollar Sukuk Index, made up of Islamic bonds from Indonesia to Saudi Arabia, gained 15 percent in the same period. Global sales of notes that comply with the religion’s ban on interest fell 24 percent to $6.6 billion so far this year. Indonesia hired HSBC Holdings, Standard Chartered and Citigroup to manage its second overseas offering of sukuk in October. The extra yield that investors demand to hold Dubai’s dollar sukuk rather than Malaysia’s has widened 30 basis points since May 28 to 409 today, according to data compiled by Bloomberg.

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. 
 
Indonesia may negotiate rates through book-building rather than in a single auction. Domestic investors are demanding higher returns from the bonds because they aren’t actively traded, according to PT Bank Danamon Indonesia and PT Bank Syariah Mandiri. Indonesia sold its first domestic sukuk in August 2008 through book-building. State-owned PT Danareksa Sekuritas, PT Mandiri Sekuritas and PT Trimegah Sekuritas arranged the sale, which raised 2.7 trillion rupiah. The government had 38 trillion rupiah of sukuk outstanding as of June 29.   (more…)

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. (more…)