The Indonesian government launched its first rupiah denominated auction Sukuk on the 13th October last year which failed to attract any winning bids as investors demanded higher yields. Its second auction held a month later attracted only IDR200 billion (US$22.4 million), less than 5% of the incoming bids.Ten auctions later, the same story was told when, on the 5th October this year, the government raised just IDR382 billion (US$42.8 million), way off the targeted IDR1 trillion (US$112 million). Through its website, Bank Indonesia (BI), the central bank, stated that investors sought yields as high as 9.37% for the five-year Sukuk and 8.5% for the 10-year notes.
Achdiarini Siwiwardhani, senior vice-president and head of HSBC Amanah Wholesale Bank in Indonesia, said the demand for higher yields is a result of a limited number of bidders, normally principal dealers such as banks and securities companies participating in the Sukuk auction. The other reason, Siwiwardhani cited, was the lack of trading of rupiah denominated government Sukuk in the international secondary markets compared to rupiah denominated conventional bonds.
The “failed” Sukuk auction has prompted BI to consider issuing Sukuk through book building to spur demand among local investors. Siwiwardhani was confident that the proposal would be a better alternative to Sukuk auction as it allows a wider pool of investors to participate in the process. “The book building process was, in fact, used when the government issued the inaugural global Sukuk offering in 2009. It successfully attracted demand from the international investors as they were keen on the new asset class. However, the book building process may be more effective if the lack of liquidity in rupiah denominated government Sukuk is resolved,” she said.
Siwiwardhani suggested that this could be done by reducing conventional bond issuances and focusing instead on Sukuk. This, she said, would result in the tightening of Sukuk pricing thus lowering yields.
Government Sukuk issuances are legislated by the Sukuk Act that was enacted two years ago. However, there is currently no regulation or legislation exempting tax for corporate Sukuk issuances. Siwiwardhani felt it was not an issue as the tax treatment of corporate Sukuk was identical to conventional bonds. She said the issue would only arise if companies wanted to issue a global Sukuk, such as the GE Sukuk last year, where a special purpose vehicle would be required to house the assets underlying the Sukuk. Stressing the need for greater clarity on the tax implications for such an issuance, Siwiwardhani explained that the new value added tax law only covered services provided by Shariah compliant banks such as the removal of double taxation for the Murabahah structure.
“It would help if there are similar guidelines on the removal of double taxation for the Global Sukuk or any other Islamic securities as well,” she said, adding that Indonesia should take a leaf from the book of other governments which have created an environment for corporates to issue Sukuk.
Malaysia, the largest market for Sukuk, has scheduled in its latest budget a cut in taxes for Shariah compliant transactions in order to promote “innovation in Islamic securities” Asked whether Indonesia would follow suit, Siwiwardhani said regulators had established a forum comprising BI and the Fiscal Policy Agency (part of the ministry of finance) which is in the midst of drafting a policy to provide tax incentives for Islamic transactions.
She said BI was also actively engaged with banks to explore offshore Shariah financing opportunities. “These discussions, however, are currently centered on boosting the size of the Shariah banking assets and banking transactions,” she said.
Siwiwardhani believes there is room to improve regulations for Islamic securities that would require a joint effort from all government bodies including the Fiscal Policy Agency, BI, Bapepam (Indonesian capital market supervisory agency) and the finance ministry.
Source : http://www.islamicfinanceasia.com/18_rep-indo.php - November 2010
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