CAPITAL MARKETS - Sukuk Spreads Tighten as RI Gears Up for 2011 Bond Issue

Indonesia’s borrowing costs relative to Malaysia’s have narrowed to the lowest level since January ahead of a planned sale of global Islamic bonds in the second half of this year.

The extra yield investors demanded to buy Indonesia’s 8.8 percent dollar sukuk compared with Malaysia’s 3.928 percent note shrank to 21 basis points on Friday from 71 basis points on March 16. (full story)


The spread with similar-maturity US Treasuries was 176 points, down from 705 when the Southeast Asian nation sold the debt in April 2009, its first overseas sukuk offering.

Confidence in Indonesia is improving as the central bank projects economic growth this year will be the fastest since 2004, while currency reserves have climbed to $105 billion, almost double the holdings in 2009.

Ratings agencies have raised the government one step short of investment grade, which may be reached by September, according to Hatta Rajasa, the coordinating minister for the economy.

“People want to buy Indonesian sukuk,” said Zulkiflee Nidzam, head of foreign exchange and bond trading at Asian Finance Bank, a unit of Qatar Islamic Bank SAQ.

“The yields are attractive and the country is doing well. The take-up rate will be good.”

Fitch Ratings lifted its credit assessment to “positive” from “stable” on Feb. 24, citing favorable economic prospects, and kept the ranking at BB+. Moody’s Investors Service increased its rating to Ba1 on Jan. 17 with a stable outlook.

The government needs at least three months to prepare the issuance, Dahlan Siamat, director of Islamic finance at the Finance Ministry, said on Wednesday.

The sale is “on schedule,” he said. Indonesia raised $650 million from the sukuk in 2009 and received orders for $4.7 billion.

However, Zeid Ayer, who helped oversee $1.6 billion of Shariah-compliant assets at CIMB-Principal Islamic Asset management, said the sukuk made for good diversification, but he probably would not buy it.

“Because it’s still expensive to me, considering it’s rated below investment grade,” he said. “As spreads have narrowed, this is a good time for the government to sell a US dollar sukuk.”

Sales of Islamic bonds in Indonesia reached Rp 16.8 trillion ($1.9 billion) this year, according to data from the Finance Ministry’s debt management office and the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK). Issuance rose 45 percent to Rp 27.76 trillion last year.

While Indonesia is home to the world’s largest Muslim population, its Rp 100 trillion of Islamic banking assets are 10 percent of Malaysia’s 351 billion ringgit ($116 billion) sector. Bank Indonesia aims to increase the market by up to 55 percent this year to try to close the gap.

Indonesia plans to start selling short-term treasury bills that comply with Islam’s ban on interest for the first time in the second half of the year, Dahlan said.

Bloomberg 

Source : http://www.thejakartaglobe.com/business/sukuk-spreads-tighten-as-ri-gears-up-for-2011-bond-issue/434303 - April 8, 2011