INDONESIA - CAPITAL MARKETS - Indonesia Eyes Middle East Buyers for Fresh Round of Sukuk Bond Sales

Indonesia plans to sell dollar-denominated Islamic bonds by the end of December, the second sale of the securities in two years, and it is looking to Persian Gulf investors to purchase the debt.

“We are targeting Middle East investors to buy our global [Islamic bonds],” said Rahmat Waluyanto, director general of the debt management office at the Ministry of Finance, in a text message to the Jakarta Globe .

“Investors from other parts of Asia, Europe and the United States are also welcome.’’  (source)

Islamic bonds, known as sukuk , comply with Shariah law by using asset returns to pay investors instead of offering interest.

When Indonesia sold $650 million of its first-ever Islamic dollar bonds in April 2009, buyers from the Middle East bought 30 percent of them, while Asian investors bought 40 percent, Americans bought 19 percent and Europeans bought the remaining 11 percent.

Back then, the Indonesian government received orders valued at $4.7 billion, which was seven times more than the $650 million in securities on offer, according to data from the Ministry of Finance.

The government set the coupon rate at 8.80 percent, higher than the current interest on other government securities. Indonesia’s 10-year bond, which has a 8.25 percent coupon rate, yields 6.91 percent. The US 10-year bond, by comparison, yields 2.15 percent.

Waluyanto said that having “more Persian Gulf investors” participate in the offering would be “OK.” He did not elaborate.

Global sukuk sales rose to $5.9 billion in the first five months this year from $5.4 billion in the same period of 2010, according to Bloomberg. The Middle East has the world’s biggest global sukuk market , followed by Malaysia.

Overseas investors continue to chase high-yielding assets in emerging markets, including Indonesian bonds. As of Aug. 23, foreign holdings of Indonesian bonds rose 26 percent to Rp 246 trillion ($28.8 million), up from Rp 195 trillion at the end of 2010.

Indonesia’s international reserves have also been climbing, up 28 percent to $123 billion at the end July, compared to $96 billion at the end of December.

Finance Minister Agus Martowardojo said on Aug. 23 that the government had planned to raise as much as $1 billion from global sukuk sales by the end of September. Sukuk bonds account for 22 percent of Indonesia’s dollar-denominated debt offerings. In April alone, the government raised $2.5 billion by selling dollar-denominated non-sukuk bonds.

Waluyanto said the government was seeking financial advisers to help arrange the Islamic debt sale. The government was also seeking investment banks from Asia, Europe and the United States to help arrange global sukuk sales.

Indonesia has been selling bonds since 2002 to help raise funds to plug its budget deficit — which is projected to reach 2.1 percent of gross domestic product this year.

The government has identified underlying assets valued at Rp 34 trillion, which have been approved by the House of Representatives, to support the debt sale.

Rent on state-owned lands and buildings is one form of payment for such securities.

Muslims make up more than 85 percent of Indonesia’s population of 240 million.

Once the financial advisers are appointed, the government will then meet overseas investors to gauge demand.

Foreign holdings of government bonds in emerging East Asia, including Indonesia, have been rising, driven by investors chasing yields, interest rate differentials, and expectations of appreciation in regional currencies, the Asian Development Bank reported on Thursday.

By the end of June, overseas investors held 34 percent of Indonesian government bonds. By comparison, at the end of March overseas investors held 22 percent of Malaysian bonds and 10 percent of bonds issued by the South Korea.

Still, the Manila-based ADB warned about the potential for a downturn in investing in the region’s bonds.

Risks include a severe economic slowdown in mature economies that will hit Asian exports, a destabilization of capital flows, poorly-timed policy action by mature markets, and potential commodity price fluctuations, it said.


Source : http://www.thejakartaglobe.com/business/indonesia-eyes-middle-east-buyers-for-fresh-round-of-sukuk-bond-sales/463073  - Sept 2, 2011