Suryani Omar & Khalid Qayum
Indonesia’s first sale of local-currency sukuk backed by roads and railways may benefit from the rupiah’s 4.7 percent gain against the US dollar this year and higher sovereign debt yields relative to Malaysia.
“I’d buy the sovereign sukuk as I believe the rupiah has more room to strengthen,” Mohd Noor Hj A Rahman, chief executive at OSK-UOB Islamic Fund Management, said on Thursday. “Yields are more attractive if you compare to what other markets are offering. You can’t get such high yields in Malaysia.”
Indonesia’s 11.8 percent Islamic bond due in August 2015 yielded 6.96 percent on Thursday, 341 basis points more than similar-maturity debt in Malaysia. The rupiah is the best performer among the 10 most-traded Asian currencies excluding the yen this year.
The Finance Ministry is seeking approval from the House of Representatives to use Rp 30 trillion ($3.5 billion) of state-owned land and office buildings as underlying assets for the sale, Dahlan Siamat, director of Islamic finance at the ministry’s debt management office, said on Wednesday.
The government will use cash flows from transport projects under construction to back the May 31 sukuk sale if it does not receive approval, he said.
Sales of local-currency sukuk, which pay asset returns to comply with Islam’s ban on interest, reached Rp 17.94 trillion this year. Issuance increased 45 percent to Rp 27.76 trillion last year.
“We’ve run out of existing buildings and land that’s been approved,” Dahlan said.
Inflation in Indonesia cooled to 6.16 percent in April from a year earlier, the lowest in six months, the government reported on Monday. The yield on Indonesia’s local-currency sukuk has declined 117 basis points, or 1.17 percentage point, since Feb. 1 and reached a 2011 low of 6.95 percent on May 3.
Malaysia’s 3.86 percent ringgit-denominated Islamic bond maturing in September 2015 yielded 3.55 percent on May 4, according to prices from Bursa Malaysia. The debt returned 0.9 percent this year compared with 3 percent for Indonesia’s note.
After accounting for Indonesia’s 6.16 percent inflation rate in April, the 2015 sukuk offers a yield of 0.8 percent. Malaysia’s consumer prices rose 3 percent in March from a year earlier, giving a real rate of return of 0.55 percent based on current yields.
The yield on Indonesia’s 8.8 percent dollar sukuk maturing in April 2014 and sold in 2009 declined five basis points to a four-month low of 2.92 percent on Friday, according to prices from Royal Bank of Scotland Group.
Indonesia has a shortage of Shariah-compliant bonds, which will also boost demand for a new type of sukuk structure, Akbar Syarief, an investment manager at MNC Asset Management, said on Thursday.
“The new structure is positive for the market as it widens the assets that can be used for sukuk sales,” he said. “If it’s a medium-term note, maybe about seven years, it’ll be well-received. I’m favoring such debt because it’s not too long.”
Overseas investors raised holdings of Indonesia’s rupiah debt by 13 percent to Rp 221 trillion as of Tuesday, compared with the end of January, according to data from the Finance Ministry.
“Currency gains and strong fundamentals are supporting investor appetite for Indonesia’s assets,” Priyo Santoso, the head of investment at Mandiri Manajemen Investasi, said on Monday. The rupiah may strengthen another 0.9 percent to 8,500 against the dollar this year, he said.
Inflation can be contained, Finance Minister Agus Martowardojo said at a gathering of the Asian Development Bank in Hanoi, Vietnam, on Thursday. The central bank is allowing the rupiah to appreciate, Bambang Brodjonegoro, the head of fiscal policy at the Finance Ministry, said at the meeting.
“The inflation numbers coming in are slightly better so sukuk should also do well,” Esther Teo, a fund manager at HwangDBS Investment Management, said on Wednesday. “Inflation was a concern, but I think the market thinks inflation has peaked and they are thinking ahead.”
The government plans to sell dollar-denominated, Shariah-compliant bonds in the second half of the year, the nation’s second offering, Dahlan said.
“We’re confident demand will be good. Just look at the recent sale of global bonds,” he said.
Indonesia sold $2.5 billion of 10-year non-Islamic dollar bonds on April 27 at a yield of 5.1 percent, after attracting $6.9 billion in bids. The auction priced to yield 175 basis points more than Treasuries, compared with a spread of 228 when Indonesia sold $2 billion of bonds in January 2010.