Record Sukuk Seen on Indonesia $92 Billion Plan: Islamic Finance

By Yudith Ho on 02:08 pm May 07, 2013
Category Business, Economy
A bank employee explains retail shariah bonds or sukuk retail (SUKRI) to a customer at BRI Bank office in Jakarta on Feb. 8, 2013. (Investor Daily Photo)

A bank employee explains retail shariah bonds or sukuk retail (SUKRI) to a customer at a BRI Bank office in Jakarta on Feb. 8, 2013. (Investor Daily Photo)

Indonesian corporate sukuk sales are off to their best ever start and the top underwriter predicts a full-year record as $92 billion of state-backed development projects buoy issuance.

Bank Muamalat Indonesia and Adira Dinamika Multi Finance were among issuers of Rp 1.5 trillion ($154 million) of securities, Financial Services Authority data show. That compares with Rp 1.9 trillion for the whole of 2012 and a record Rp 2.3 trillion in 2008. The market is still just a fraction of Malaysia’s, where companies sold 95.8 billion ringgit ($32 billion) of sukuk last year.

President Susilo Bambang Yudhoyono is seeking to reduce fuel subsidies to set aside more funds for roads, railways and power stations to spur growth from the slowest pace since 2010 last quarter. Finance companies have accounted for 72 percent of sales this year, while state-owned construction company Hutama Karya and electricity producer Perusahaan Listrik Negara may sell Islamic bonds in 2013, according to Danareksa Sekuritas, the top underwriter last year.

“The other sectors with the biggest potential to actively tap into the sukuk market will be those involved in infrastructure-related projects and utilities,” Alhami Mohd Abdan, head of international finance and capital markets at OCBC Al-Amin Bank Bhd. in Kuala Lumpur, said in a May 3 interview. Sales will reach Rp 2.5 trillion to Rp 3 trillion this year, he forecast.

State-owned companies

State-owned enterprises have committed about Rp 900 trillion through the end of 2014 for infrastructure and real- sector projects, Coordinating Minister for the Economy Hatta Rajasa said on Dec. 18. Listrik Negara last sold Rp 500 billion of Islamic securities in 2010, while Hutama Karya would be issuing Shariah-compliant notes for the first time, data compiled by Bloomberg show.

Construction company Adhi Karya sold Rp 125 billion of sukuk in March, after Pefindo Credit Rating Indonesia raised it to five steps above investment grade from four last June, citing strong cash flow. Property companies Bumi Serpong Damai and Lippo Karawaci have also been upgraded by Pefindo in the past year. Indonesia’s non-Islamic corporate debt market will triple in five years, Mandiri Sekuritas forecast last month.

‘Great demand’

“Property and construction companies will boost debt sales as their ratings rise, reducing borrowing costs and brightening the option to sell debt,” Yudistira Slamet, head of debt research at Danareksa, said in a May 3 interview from Jakarta. “We recommend our clients tap the sukuk market because of the great demand, which will further suppress coupons,” he said, adding that he was forecasting Rp 2.5 trillion to Rp 3 trillion of company issuance this year.

The average yield on global Shariah-compliant debt fell one basis point, or 0.01 percentage point, to 3.12 percent on May 2, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, after reaching an all-time low of 2.67 percent on Jan. 10. The premium over the London interbank offered rate, or Libor, declined one basis point to 188 basis points.

Indonesia’s finance ministry plans to sell Rp 53 trillion of Islamic bonds this year, compared with Rp 57.1 trillion in 2012, as it seeks to boost trading volumes by selling less to the national Hajj fund, which holds the notes until maturity, Dahlan Siamat, director of Islamic financing at the debt management office, said Jan.

Tax Rules

Indonesia’s 8.8 percent dollar sukuk due April 2014 yielded  six basis points less than Malaysia’s 3.928 percent Islamic notes due June 2015, even though the former country is rated four levels lower by Standard & Poor’s. The yield on the Indonesian securities was 96 basis points higher on Jan. 11, the biggest gap in seven months, data compiled by Bloomberg show.

There is no specific rule on how sukuk should be taxed in Indonesia, although the Financial Services Authority has made sure that no corporate Islamic bonds have been double-taxed, Etty Retno Wulandari, a director at the regulator, said in July 2012. Bank Indonesia asked the taxation department in 2009 to issue a circular to clarify equal treatment for Shariah- compliant debt, Executive Director Edy Setiadi said last September, but this still hasn’t happened.

“The country is well-positioned to become a global center of Islamic finance and one of the key ingredients in achieving this is having clear tax laws,” Mohamad Safri Shahul Hamid, the Kuala Lumpur-based deputy chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group Holdings Bhd., said in a May 3 e-mail. “The first step is to formalize a tax neutrality provision for Islamic finance transactions, including sukuk.”

Bigger Market  

Islamic bonds have returned 1.5 percent this year, according to the HSBC/Nasdaq index, while debt from emerging markets gained 0.9 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.

Worldwide sales of Shariah-compliant notes, which pay returns on assets to comply with the religion’s ban on interest, increased 3.8 percent to $14.8 billion in 2013 from the same period last year, data compiled by Bloomberg show. Issuance amounted to an all-time high of $46.5 billion in 2012.

There will be $950 billion of worldwide demand for Islamic bonds by 2017, according to a December report by Ernst & Young LLP. That compares with $267.6 billion of outstanding sukuk at the end of June 2012, according to Malaysia’s Securities Commission. Indonesia sold $3 billion of non-Islamic global bonds on April 8 at the country’s lowest-ever yield for dollar notes, with investors bidding for more than four times the amount offered.

“Supply is beginning to increase and catch up to ever- growing demand,” Akbar Syarief, a fund manager overseeing about Rp 3.3 trillion at MNC Asset Management in Jakarta, said in a May 3 interview.

“We hope a bigger corporate sukuk market will mean better liquidity and more efficient pricing, and therefore greater demand for the instruments.”

Bloomberg