By Soraya Permatasari and Suryani Omar
The yield on Indonesia’s 8.8 percent sukuk due in April 2014 has climbed 68 basis points to 3.33 percent since reaching a record-low 2.65 percent on Oct. 14, according to the Royal Bank of Scotland Group. It jumped 23 basis points in the fourth quarter. The extra yield for the debt over Malaysia’s 3.928 percent note widened to 37 on Jan. 11, reversing from 17 basis points less on Jan. 5.
Indonesian yields may rise further because inflation will accelerate this year as fuel subsidies are reduced and rice prices increase, according to Jakarta-based PT Mandiri Sekuritas. Moody’s Investors Services placed its rating for Indonesia on review for a possible upgrade in December after raising the ranking to Ba2 in September, two steps below investment grade.
“There are two things that will push inflation up, higher food prices and a government plan to cut fuel subsidies,” Ali Hasanudin, a credit analyst at PT Mandiri Sekuritas, a unit of Indonesia’s largest lender, said in an interview yesterday. “That concern outweighs optimism about a possible rating increase to investment grade this year.”
Bonds ‘Expensive’
The government announced last month it will reduce subsidies in a country that’s a net oil importer. The cost of the commodity climbed 3.4 percent this week to $91.05 per barrel and reached a two-year high of $92.58 on Jan. 3, according to data compiled by Bloomberg. The price of medium-grade rice, climbed 12 percent in the past six months, the data show.
Consumer prices rose 6.96 percent in December from a year earlier, the fastest pace in 20 months, the Central Bureau of Statistics reported on Jan. 3. The yield on Indonesia’s sukuk is a negative 3.63 percent when adjusted for inflation compared with 0.82 percent in Malaysia.
Consumer price increases may average more than 7 percent in 2011, according to Hasanudin. That compares with last year’s average of 5.12 percent, Bloomberg data show. In Malaysia, the average was 1.7 percent in the first 11 months of last year.
Indonesian yields may rise further relative to Malaysia’s because of the country’s lower credit rating, according to Kuala Lumpur-based AmInvestment Management Sdn. Malaysia is rated A3 by Moody’s, five levels higher than Indonesia.
“Even if Indonesia is upgraded to the lowest level of investment grade, the bonds are still expensive,” Mohd Farid Kamarudin, who helps manage 1.3 billion ringgit ($425 million) of Islamic assets at AmInvestment, a unit of last year’s fourth- biggest sukuk underwriter, said in an interview yesterday. “The Malaysian sukuk are cheap so people should start to buy.”
Planned Sales
Indonesia’s sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, rose 56 percent to 26.2 trillion rupiah ($2.9 billion) in 2010, according to Bloomberg data. Global sales fell 15 percent to $17.1 billion last year.
The Finance Ministry plans to sell 200.6 trillion rupiah of local and overseas debt in 2011 to fund a budget deficit estimated to reach 124.7 trillion rupiah, 1.8 percent of gross domestic product, Rahmat Waluyanto, director general of the Debt Management Office, said in an interview in Jakarta Jan. 11.
Indonesia’s government can issue up to 30 trillion rupiah of Ijarah type sukuk this year, said Waluyanto. Islamic debt with real estate as the underlying asset is known as Ijarah, or a sale and lease agreement.
Global Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
Interest Rates
The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 14 basis points this week to 280, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed four basis points to 330, data compiled by Bloomberg show.
The yield on the Malaysian notes fell 15 basis points this week to 2.755 percent. The yield on Indonesian sukuk increased 15 basis points this week.
Indonesia may reach investment grade within two years, which would place it on a par with India and Hungary, Anton Gunawan, the chief economist at Jakarta-based PT Bank Danamon Indonesia, said in an interview on Dec. 2. A rating upgrade may bode well for the government’s plan to sell bonds this year, Gunawan said.
‘No Exception’
Rising consumer prices may prompt the central bank to raise interest rates this year, driving Indonesian yields higher, Celly Natalia Pertiwi, a portfolio manager who helps oversee 950 billion rupiah of bond assets at PT Danareksa Investment Management in Jakarta, said yesterday.
“Yields will continue to go up because the market still has a negative perception of Indonesian assets because of high inflation,” Pertiwi said in an interview.
The central bank kept its benchmark rate at 6.5 percent all last year even as Asian nations from Malaysia to India boosted borrowing costs to temper the effect of inflows into the region’s higher-yielding assets.
Bank Indonesia may raise its reference rate by 75 basis points starting in March to curb price increases, according to a Jan. 12 report by Citigroup Inc. Policy makers next meet to set rates on Feb. 4.
“In the wake of the U.S. and other developed countries printing money, people underestimated the inflationary pressure,” Scott Lim, who oversees the equivalent of $670 million of assets as chief executive officer at Kuala Lumpur- based MIDF Amanah Asset Management Bhd., said in an interview yesterday. “Indonesia is no exception, it will also feel the impact.”
To contact the reporters on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Suryani Omar in Singapore at somar6@bloomberg.net.
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.
Source : http://www.businessweek.com/news/2011-01-13/indonesia-sukuk-drop-as-inflation-curbs-demand-islamic-finance.html, - Jan 14, 2011
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