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Indonesia to tap sukuk market
January 24, 2013
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JAKARTA: Indonesia, Southeast Asia’s largest economy, plans to raise $1 billion through a global Islamic bond in the second half of 2013 to help plug its budget gap, a top official told Reuters.

This would bring the contribution to its annual budget from domestic and global Islamic bonds to as much as 57 trillion rupiah ($5.9 billion), the same amount as 2012.

The country, whose economy grew faster than its regional peers at 6.3 per cent last year, will also seek funds to kick-start $54.4 billion worth of infrastructure projects this year.  “We are in a very good economic condition and we have the political stability to attract investors,” Dahlan Siamat, director of Islamic financing policy at Indonesia’s finance ministry, told Reuters in a telephone interview this week.

The size and maturity of the Islamic bond will be determined after a roadshow planned for March for the two global conventional bonds it has scheduled for 2013. Sukuk pay returns on money invested, instead of interest, and are a major funding tool for banks and corporates in the Middle East and southeast Asia. Global demand for sukuk is expected to reach $421 billion by 2016 from $240 billion in 2012, according to a Thomson Reuters survey last year.

Indonesia has come to rely on conventional and Islamic bonds, or sukuk, to plug the deficit created largely by the $18 billion to $21 billion it spends on fuel subsidies annually.

“There is no reason to stop issuing sukuk, it has become part of our strategy. We don’t want to be completely dependent on conventional bonds, so it is important that we have this alternative,” said Siamat.

But he added, “We are taking a different approach in developing the sector -unlike countries like Malaysia, Islamic finance here is market driven and growing from the bottom up.”

Indonesia would not issue more sukuk this year because “the market is not quite developed yet, and of course we have had to see things from the cost perspective,” he said, estimating the extra cost of issuing Islamic bonds at around 25 basis points (bps), although this has come down from 50-60 bps a few years ago.

The country has gone to the global market several times to issue dollar-denominated Islamic bonds, the last being a $1 billion ten-year sukuk in Nov.2012 which was priced at 3.3 per cent after attracting orders of over $5 billion.

“We look to develop our local market first, so our issuance is mostly concentrated there. The more supply of sukuk into the market, the better, but the big problem is how illiquid the secondary market in Indonesia is,” said Siamat.

This means bonds are often held to maturity, although he hopes turnover will improve when the government hires primary dealers. “They will have the responsibility as market makers, with this the market will be much more liquid,” he said.

Siamat said Indonesia is also exploring the use of sukuk Wakalah or an agency structure -a switch from the Ijarah or lease structure it currently relies -to allow for a more flexible use of the underlying asset.

It is also identifying projects to be funded directly through sukuk. The funds currently raised from sukuk go to a state fund, which finances a variety of projects. Indonesia’s Islamic banking industry, which is expected to grow five-fold to $83 billion by 2015, must be able “to compete with conventional peers ... on the basis of service quality, variety of products, efficiency and returns,” Siamat said.

He said the industry’s growth had been “fantastic” although asset ownership by Islamic banks remained low at 4.2 per cent of the $408 billion in Indonesia’s banking sector.

“This may not be as impressive as conventional banks, but the Islamic side has seen their assets grow from less than 1 trillion rupiah ($104 million) in 2006 to 6 trillion Indonesian rupiah ($622 million) last year.”

Although nine out of ten Indonesians are Muslim, asset ownership by Islamic banks rank among the lowest globally.

Siamat said the number of full-fledged Islamic banks has more than tripled since the government stopped conventional banks using Islamic windows, and that the central bank has more “lenient” requirements on the paid-up capital for Islamic banks.

“The government could provide incentives, in the area of tax treatment (for Islamic banks) for example, but it is not that easy because we also have to think about other industries.

 “Incentives are not always beneficial ... It is better to let Islamic finance develop on its own, so it is much stronger to face the coming years,” he said.


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