Failed Islamic Bond Auctions Forcing Govt to Look Overseas
Khalid Qayum & Soraya Permatasari
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 on Tuesday is seeking Rp 1 trillion.
Malaysia, the biggest market, has generated 15 billion ringgit ($4.7 billion) from five sukuk sales this year, government data show.
Indonesia may negotiate rates through book-building rather than in a single auction, Dahlan Siamat, director for Islamic financing at the ministry, said last week. 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.
Indonesia’s dollar-denominated sukuk due in 2014 offer investors a 4.9 percent return. The yield, which was as high as 8.63 percent when the bonds were first sold in April 2009, has fallen to 3.81 percent.
Indonesia’s Islamic banking assets totaled $8 billion at the end of last year, 2.9 percent of its total, compared with Malaysia’s $93 billion, accounting for 19.6 percent of its finance industry.
“Until the market is fully developed, investors will continue to demand a very high liquidity premium,” said Helmi Arman, a strategist at Bank Danamon. “There won’t be much improvement in the auction as the outstanding sukuk aren’t liquid enough.”
The government plans to sell five-, seven- and 10-year Islamic bonds on Tuesday, according to the Finance Ministry’s Web site. It failed to sell any at three auctions this year. The remaining seven sales all fell short of target.
The government raised Rp 474 billion at its last auction on June 15, less than the 1 trillion rupiah sought because yield bids were too high. It received offers amounting to 1.76 trillion rupiah. The yield on the seven-year sukuk dropped 20 basis points from the previous sale to 8.65 percent.
The yield on the sukuk maturing in January 2017 rose one basis point to 8.07 last week, according to prices from Indonesia’s Interdealer Market Association.
The yield on the seven-year non-Islamic government bond is lower at 7.9 percent and fell 7 basis points on Thursday.
“Last year, the government offered yields of 11 percent at one point, so investors want to bid at 11 percent,” said Tutuy Guntara, an investment manager at Bank Syariah Mandiri in Jakarta. “The government wants about 8 percent.”
The industry’s global assets may almost triple to $2.8 trillion by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board. Transactions are based on the exchange of asset flows rather than interest, to comply with Shariah principles.
“We haven’t seen much interest from foreign investors in our regular sukuk auctions,” the Finance Ministry’s Siamat said. “It’s possible” a book-building would raise their participation.
Indonesia is turning to global investors this year to finance its budget deficit, which the government estimates will increase to 2.1 percent of gross domestic product from 1.6 percent.
The government is planning to sell as much as $650 million of Islamic bonds overseas in October. The nation had its first international sukuk issue last year.
“We are going to look at Indonesia’s global and domestic sukuk offerings,” said Rafael Martinez Dalmau, director of Islamic investments at BNP Paribas Investment Partners.
“Indonesia is a growth story and its economics are very solid. We favor the Indonesian market as a whole.”