Indonesia is marketing its annual sale of dollar-denominated Islamic bonds at the lowest yield since 2012 amid optimism President-elect Joko Widodo will reduce fuel subsidies and cut red tape.
The country is offering a benchmark-sized sale of Shariah-compliant debt due in 10 years at an initial guidance of about 4.625 percent, according to a person familiar with the matter who asked not to be named as the information is private. That compares with the 6.125 percent yield the government paid on notes maturing in 5.5 years in 2013 and the record-low 3.3 percent rate on 10-year sukuk sold the previous year. A benchmark-sized offer is commonly at least $500 million.
The Constitutional Court rejected an appeal disputing the election result on Aug. 21, clearing the way for Widodo, known as Jokowi, to take power in October. Bank Indonesia has added $11.2 billion to its foreign-currency holdings this year as the rupiah rallied 3.6 percent to lead gains in Asia. That’s a far cry from 2013’s 21 percent plunge in the currency, which prompted officials to “compromise” and accept higher yields at the last dollar sukuk sale to bolster reserves.
“Indonesia can afford to offer a lower yield as the macro picture is much better,” Akbar Syarief,fund manager at PT MNC Asset Management in Jakarta, which oversees more than $200 million, said by phone today. “We think that fuel subsidies will be cut, which would be a positive. It’s only a matter of when and by how much.”
Falling Yields
The yield on the nation’s 3.3 percent Islamic dollar notes due November 2022 dropped 32 basis points this quarter to 4.16 percent, data compiled by Bloomberg show. That compares with a 25 basis point decline to 2.85 percent for similar-maturity Malaysian sovereign sukuk. The yield on the Indonesia’s non-Islamic dollar debt due January 2024 has dropped 41 basis points this quarter to 4.12 percent.
Jokowi said he is committed to reducing fuel subsidies that account for 14 percent of the proposed 2015 budget, after President Susilo Bambang Yudhoyono rebuffed his request to revise the spending last week.
Indonesia plans to sell sovereign bonds denominated in dollars, euros and yen next year to meet a record gross debt issuance target of 459 trillion rupiah ($39 billion), Robert Pakpahan, director general at the finance ministry’s debt management office in Jakarta, said in an interview yesterday. That’s 13 percent higher than this year’s goal.
Improving Confidence
Moody’s Investors Service ranks Indonesian government notes at Baa3, its lowest investment grade. Although the country has a small public debt burden, its low gross domestic product per capita and the high proportion of its debt owned by foreigners make it susceptible to external risks, Moody’s said in an Aug. 19 statement. Fitch Ratings also assigns Indonesia its top investment grade, while Standard & Poor’s rates the nation at its top junk level.
Investor confidence in Indonesia has improved after Jokowi secured victory in the July 9 presidential election. As governor of Jakarta since 2012, he has restarted stalled transport projects, increased tax revenue by moving collection online and dismissed senior officials for poor performance.
The cost to insure the nation’s debt against non-payment using five-year credit-default swaps slid 27 basis points this quarter to 133 basis points, according to data provider CMA. That compares with Thailand’s 25 basis point drop to 86.
“The numbers are more favorable for Indonesia this year,” Priyo Santoso, chief investment officer at PT Mandiri Manajemen Investasi, which oversees more than $2 billion in assets, said in an interview in Jakarta last week. “Investors see that Indonesia’s political risk has subsided, so that’s followed by a falling risk premium on the yield.”
Growing Interest
Indonesia’s government hired Standard Chartered Plc, HSBC Holdings Plc, CIMB Group Holdings Bhd. and Emirates NBD PJSC to arrange the sale, the debt office’s Pakpahan said in May.
The average yield on dollar-denominated sukuk fell eight basis points this quarter to 2.78 percent on Aug. 29, a Deutsche Bank AG index shows. That compares with the five basis point climb to 5.37 percent for the average yield on emerging-market sovereign debt, according to a JPMorgan Chase & Co. gauge.
Hong Kong and Luxembourg are set to follow the U.K. in selling bonds that pay returns on assets to comply with Islam’s ban on interest this year. Indonesia’s offer “reflects the growing interest in Islamic finance as a source of sovereign funding,” Khalid Howladar, global head of Islamic finance at Moody’s in Dubai, said in last month’s statement.
(Bloomberg / 02 September 2014)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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