Indonesia Yield Gap to Malaysia Shrinks on Oil: Islamic Finance
The yield premium for Indonesia’s dollar-denominated Islamic bonds over Malaysia’s dropped by the most in a year this month as falling oil prices eased the burden on the budget and made room for economic stimulus.
The spread between Indonesia’s 8.8 percent Islamic debt due April 2014 and Malaysia’s 3.928 percent note due June 2015 narrowed 33 basis points in June to 56 basis points. The yield on the Indonesian securities fell 42 basis points, while the Malaysian rate declined five basis points. Five-year credit-default swaps on Indonesian debt dropped 40 basis points in June, the most since October, according to data provider CMA, even as the rupiah headed for a fifth monthly decline.
The government will test investor appetite when it sells global Shariah-compliant securities following the Idul Fitri holiday that ends Aug. 22, Rahmat Waluyanto, the director-general at the debt management office, said June 11. A seven-year sukuk would probably yield 3.5 percent to 3.75 percent in the coming sale, down from 4 percent at the last offering in November, after two of the three major ratings companies returned the nation to investment grade, according to Mega Capital Indonesia and BNI Asset Management.
“Investors are still very optimistic about Indonesia despite the weak rupiah,” Brustifian Domi, the head of fixed income at Lautandhana Securindo, said in an interview in Jakarta yesterday. “Our budget deficit is small so we have the capacity to roll out stimulus as needed, and growth is driven by domestic consumption, so it may be more resilient compared with its regional peers.”
Five-year credit-default swaps traded at 205 basis points, or 2.05 percentage points, on June 27 from this year’s high of 254 on June 1, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts insure debt against non-payment and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.
“The declining credit-default swaps level indicates investor appetite to enter the Indonesian market because of strong fundamentals,” Ariawan, a fixed-income analyst at Mega Capital, who like many Indonesians goes by only one name, said in a June 27 interview in Jakarta. “The new sukuk will definitely yield less” than previous ones, he said.
Worldwide sales of bonds that comply with Islam’s ban on interest reached $20.8 billion this year, compared with $14 billion in the same period of 2011, according to data compiled by Bloomberg. Offerings totaled a record $36.7 billion in the whole of last year.
The government is confident it can maintain its budget deficit at 2.3 percent of gross domestic product, below the legal limit of 3 percent, Deputy Finance Minister Anny Ratnawati said June 19. Oil prices fell 22 percent since March 30, a day before parliament decided to refrain from reducing fuel subsidies. Standard & Poor’s, the only major ratings company that doesn’t assign Indonesia an investment-grade ranking, said it was “disappointed at the setback.”
“The rating upgrade from S&P is one of the catalysts we are waiting for after it was unfortunately delayed,” Sonny Afriansyah, a portfolio researcher at BNI Asset Management in Jakarta, which manages Rp 6.1 trillion ($646 million) of funds, said in a June 27 interview. “When we return to investment grade at S&P, we expect to see yields decline much further.”
Shariah-compliant securities worldwide returned 5 percent in 2012, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, while debt in developing markets rose 6.9 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.
Average yields on global Islamic bonds declined three basis points, or 0.03 percentage point, to 3.46 percent on June 27, the lowest level since August, according to the HSBC/Nasdaq index. The difference between the average yield and the London interbank offered rate, or Libor, narrowed three basis points to 242 basis points.
Indonesia will implement stimulus measures by tapping last year’s 24 trillion rupiah budget surplus to fund building projects and raise the tax-free annual income level to boost consumption as the debt crisis in Europe threatens to derail global growth, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said on June 13.
Bank Indonesia predicts the economy will grow at the lower end of its 6.3 percent to 6.7 percent forecast range this year, supported by strong domestic consumption and investment, it said in a June 12 statement. The nation’s population of 248 million, the world’s fourth-largest, means it is less reliant on exports than many other Asian economies. Malaysia’s gross domestic product will increase by 4 percent to 5 percent in 2012, central bank Governor Zeti Akhtar Aziz said last month.
“Malaysia’s sukuk is relatively steady as the economy has been fairly stable,” Sheikh Faiz Mohamed, the fixed-income manager at the investment division of Syarikat Takaful Malaysia Bhd., which oversees about 5 billion ringgit ($1.6 billion) of assets, said in a phone interview from Kuala Lumpur yesterday. “The growth story is more with Indonesia because it has more potential considering the bigger population and rising incomes.”