Indonesia plans to raise the equivalent of almost $2 billion in combined yen- and dollar-denominated Islamic bonds later this year as part of its efforts to plug a widening budget deficit.
Southeast Asia’s largest economy plans sell $750 million of so-called samurai bonds and $1 billion of US-currency bonds, both of them sukuk, in October.
“The figures and timing are still moving,” Robert Pakpahan, acting chief of the debt management office at the Finance Ministry, told the Jakarta Globe via text message on Friday.
Indonesian officials will travel overseas to gauge investor demand in the notes, Robert said, without providing further details.
The government has been selling both conventional and Islamic bonds in recent years to help plug its budget deficit, which is forecast to reach 2.3 percent of gross domestic product this year.
This year’s US-dollar sukuk will be the country’s third sale of such notes, after the sale of similar notes last year and in 2009.
Indonesia last sold global Shariah-compliant debt on Nov. 14 last year. The $1 billion of debt due in November 2018 was auctioned at a yield of 4 percent. That compared to an 8.8 percent yield on the debut sale of five-year Islamic dollar bonds in April 2009, which raised $650 million.
In the 2009 sale, the government received orders valued at $4.7 billion, according to Ministry of Finance data. Buyers from Asia accounted for 40 percent of the sale, while Middle East investors bought 30 percent of the sale, Americans purchased 19 percent and Europeans acquired the remaining 11 percent.
Sukuk bonds comply with Shariah law by using asset returns to pay investors instead of offering interest.
This year’s samurai bond sale will be the second for the country. Indonesia sold 35 billion yen ($373 million) of 10-year, 2.73 percent bonds guaranteed by the Japan Bank for International Cooperation in July 2009. The government hired Daiwa Securities Capital Markets and Nomura Securities to help sell the yen-denominated bonds.
Indonesia has benefited from an upgrade in the assessment of its sovereign debt to investment grade by Fitch Ratings late last year and Moody’s Investors Service early this year. The rating is helping to entice foreign investors to buy the country’s debt paper.
Increasing foreign investment is expected to strengthen the rupiah, which has fallen in recent months, prompting the central bank to attempt to stabilize the local currency by selling dollars in order to buy rupiah.
Bank Indonesia’s foreign exchange reserves fell to $106.56 billion in July, down from a high of $124 billion in August last year.
The Middle East has the world’s biggest US-dollar sukuk market, followed by Malaysia and Indonesia. Muslims make up more than 85 percent of Indonesia’s population of 240 million.
Finance Minister Agus Martowardojo has said previously that the government plans to raise as much as $1 billion from US-dollar sukuk sales this year.
Beyond sukuk, the government raised $2.5 billion by selling dollar-denominated bonds in April. Its sale of both dollar- and rupiah-denominated bonds date back to 2002, with the funds used to cover government deficits.
The government has identified underlying assets valued at Rp 34 trillion ($3.6 billion) that have been approved by the House of Representatives to support the debt sale. Rent on state-owned lands and buildings is one form of payment for such securities.
The samurai bonds represent just the latest move to increase economic engagement between Indonesia and Japan, a former economic powerhouse grappling with sluggish growth.
Actual investment from Japan reached $1.5 billion in 2011, more than double the 2010 amount of $713 million.
Bank Negara Indonesia recently established a “Japan Desk” to deal with the approximately 1,000 Japanese companies operating in Indonesia.
Toyota is one of approximately 1,000 Japanese companies with a presence in Indonesia. Economic ties between the North Asian and Southeast Asian nations are set to grow with ‘samurai’ sukuk bonds. JG Photo/Safir Makki