Dion Bisara

Government Plans To Issue Sukuk Backed By Projects

The government plans to introduce project-backed Islamic bonds by the end of the year in an effort to diversify its budget financing sources, an official said on Friday.

“So far, we have issued asset-backed Islamic bonds. Now we are preparing the project-based ones,” said Rahmat Waluyanto, the head of the Finance Ministry’s debt management office.

Proceeds from the bonds, also known as sukuk , would go directly to certain government projects, mainly in infrastructure, and those same projects would serve as the bonds’ underlying value, Rahmat said.

“This is now being discussed with the relevant ministries and departments,” he said.

Rahmat said that dollar- and rupiah-denominated bonds would be issued, adding that domestic issuance would be prioritized over sales to foreign investors.

“As always, global markets provide financing opportunities,” he said. “And anyway, dollar-denominated bonds are necessary to strengthen our foreign exchange” reserves, he said.

Rahmat expressed confidence the project-based sukuk would arouse significant interest.

“Just look at our global sukuk,” he said. “At first, they said it wouldn’t sell and could not compete with Malaysia’s. It turned out to be a hit, receiving about $7.2 billion in bids,” Rahmat said.

The government in February issued its first dollar-denominated Islamic bonds, of which it decided to sell only $650 million due to limited underlying assets.

The House of Representatives agreed to use Rp 13.6 trillion ($1.35 billion) of government assets for sukuk issuance this year, all of which has been used for the retail and global sukuk issues. Now the government is struggling to find a Rp 27 trillion more worth of assets to back more Islamic bonds.

Purbaya Yudhi Sadewa, chief cconomist at the state-owned Danareksa Research Institute, said sukuk was a smart way to attract funding from Middle Eastern investors and domestic companies with strong Islamic values. “These are sources we have not fully tapped all this years,” he said.

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