Manulife Sees Records as Indonesia Cuts Sales: Islamic Finance

Indonesia’s decision to cut sukuk sales as much as 12 percent in 2013 will extend the decline in rupiah yields from a record-low, according to Manulife Asset Management Indonesia and CIMB-Principal Asset Management.

The finance ministry will offer less than the Rp 57.1 trillion ($5.9 billion) of Shariah-compliant bonds sold in 2012 and at least Rp 50 trillion, Dahlan Siamat, Islamic finance director at the debt management office, said in a Nov. 30 interview. The yield on the 11.8 percent notes due August 2015 fell 49 basis points last month, reaching 4.96 percent yesterday before rebounding three basis points today, compared with a one basis point decline to 3.24 percent for like-maturity Malaysian securities.

Indonesia’s debt is 24 percent of its gross domestic product, less than half that of Malaysia, reducing the pressure on Finance Minister Agus Martowardojo to sell bonds. The country wants to reduce its reliance on the national Hajj fund, which holds 29 percent of outstanding sukuk, by selling less to it, Siamat said. Foreign ownership of Indonesian local-currency sovereign debt has risen 12 percent this quarter, according to finance ministry data.

“The less the supply, the more attractive the notes become, providing issuance is still adequate to maintain reasonable trading volume, which it is,” Ezra Nazula, who manages 25 trillion rupiah as head of fixed-income at Manulife Asset in Jakarta, said in a Nov. 30 interview. “The performance of rupiah sukuk will be positive until the end of this year as there will be no more sales, while capital flows into local bonds continue.”

Trading Volumes

Indonesia sold 27 percent of its Shariah-compliant securities this year to the Hajj fund, which is managed by the Ministry of Religious Affairs and consists of money deposited by pilgrims to pay for their trips to Mecca in Saudi Arabia. The government wants to reduce the amount it sells to the fund as those notes are held to maturity and don’t help improve trading volumes, Siamat said.

Daily transactions of rupiah-denominated Islamic bonds averaged Rp 380 billion this year through November, compared with Rp 179 billion in 2011, according to debt management office figures.

Investors bid for an average of three times the amount offered at the 19 Shariah-compliant bond auctions this year, official data show.

Strong Demand

There is 88.5 trillion of outstanding Indonesian government sukuk excluding notes held by the Hajj fund, according to finance ministry data. That’s around half of the 168.7 trillion of assets held by the country’s Islamic lenders, central bank data show, suggesting they have the financial capacity to buy more of the debt.

“Investors would be reticent about selling, even at current high prices, as finding new Shariah-compliant notes to invest in will be difficult,” Fadlul Imansyah, a Jakarta-based fund manager at CIMB-Principal Asset, which manages Rp 1.7 trillion of assets, said in an interview yesterday. “Yields will definitely fall as demand from Islamic institutions exceeds supply.”

International demand for bonds that comply with the religion’s ban on interest pushed the average yield on global Islamic notes to a record low of 2.76 percent on Nov. 30. The yield rose nine basis points, or 0.09 percentage point, yesterday to 2.85 percent, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. The difference between the average and the London interbank offered rate, or Libor, widened eight basis points to 192 basis points.

Domestic Priority

The low yields have spurred a 69 percent increase in worldwide sales of Shariah-compliant debt this year to an all- time high of $44.5 billion, data compiled by Bloomberg show. That compares with the previous record of $36.7 billion for the whole of 2011.

Islamic notes have gained 9.2 percent this year, the HSBC/Nasdaq index shows, compared with a 17.6 percent return for emerging-market securities, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.

Indonesia sold $1 billion of global Shariah-compliant bonds last month. The sale, at which bids exceeded the amount offered by five times, was the first part of a $3 billion program. The government will maintain its international presence by issuing at least once a year, although its top priority is to develop the domestic market, the debt management office’s Siamat said.

Project Sukuk

The finance ministry has approved Rp 24 trillion of state-owned assets to back sukuk sales in 2013, while the remainder will be supported by government projects, he said. A lack of property to back the notes will no longer be a constraint due to the project-based structures that were used for the first time this year, Siamat said.

“We are now more confident of the market’s stability, so we will disclose our sales target to the public for the first time as we know it can be achieved,” he said, adding that the exact figures will be approved by year-end. “The dip in total issuance next year will not become a trend as the government has committed to deepening the Islamic capital market.”

Bloomberg