SUKUK - Indonesian Government Banks on Rupiah Bonds (and Sukuk) to Cover the Budget Gap

Jakarta. The government has announced plans to take advantage of strong investor appetite for Indonesian assets and rely more on rupiah-denominated bonds than foreign-exchange debt to cover the budget deficit next year.

“That is our priority. We hope that the domestic debt market will be more developed and the base of investors will also increase,” Rahmat Waluyanto, director general of debt management at the Finance Ministry, said over the weekend.



He said the state planned a total of Rp 205 trillion ($23 billion) in rupiah bond sales next year to avoid the risks involved in issuing foreign-denominated debt.

For example, if bonds are issued in dollars and that currency continues its downward trend, the debt will lose value. Issuing local currency debt also helps avoid volatility in international markets.

The state budget deficit is forecast to fall to Rp 124.7 trillion, or equivalent to 1.8 percent of the gross domestic product next year, compared with this year’s estimated Rp 133 trillion, or 2.1 percent of GDP.

The government is not expecting to have much trouble finding takers for the debt. Indonesia’s markets have been among the best performers in the world as investors seek high-yielding assets as growth in advanced economies such as the United States and Europe stagnate.

Analysts and the World Bank have said that even more foreign funds are expected to seek assets in emerging economies after the Federal Reserve pumps $600 billion to support US recovery.

With the huge expected demand, it will also cost the government less to issue the debt.

Rahmat said next year’s domestic bond issues would include a combination of conventional bonds and sukuk , or Islamic bonds, to be sold to retail and institutional investors.

“We will still sell foreign exchange bonds, but they will be complementary,” he said.

Indonesia sold 10-year yen-denominated bonds worth 60 billion yen ($731 million) on Nov. 12. The debt, guaranteed by the Japan Bank for International Cooperation, had a coupon of 1.6 percent and targeted banks and insurers in Japan. The state also issued securities worth 35 billion yen in July last year.

Rahmat said the state had issued Rp 150.91 trillion worth of bonds so far this year, as of the end of October, or around 81 percent of its Rp 175 trillion target.

Source : http://www.thejakartaglobe.com/business/government-banks-on-rupiah-bonds-to-cover-the-budget-gap/407752  - Nov 21, 2010