Indonesia will probably have to pay the highest yield since 2010 when it sells Islamic bonds to individuals this month, as households seek greater protection from inflation amid a selloff in emerging-market assets.
The nation will need to offer a coupon of about 8.6 percent on the three-year rupiah retail sukuk, Sergey Dergachev, who helps oversee $9 billion as a senior portfolio manager at Union Investment Privatfonds in Frankfurt, wrote in a Jan. 29 e-mailed response to questions.
That compares with the 6 percent paid to sell 15 trillion rupiah ($1.2 billion) of similar debt a year ago, and the 8.39 percent yield on those notes in the secondary market, data compiled by Bloomberg show.
Borrowing costs in developing nations from Turkey to Brazil are surging as central banks boost policy rates to curb inflationary pressure and stem outflows spurred by the Federal Reserve’s stimulus cuts. Indonesia, dubbed one of the “fragile five” emerging markets by Morgan Stanley, is seeking to sell a record amount of debt in 2014 to fund energy subsidies and build roads and ports, as it grapples with inflation that has topped 8 percent for the last seven months.
“It may be a tough sell, given the reassessment of emerging-market risk and the currently fragile market sentiment,” Ray Choy, regional head of fixed-income research at RHB Research Institute, a unit of RHB Capital, said in a Jan. 29 interview from Kuala Lumpur. “The retail sale may help diversify the investor base to potentially less-volatile market participants who are longer-term investors.”
The government will announce the coupon rate as soon as Feb. 12, before beginning an approximately two-week long offer period, Eri Hariyanto, spokesman at the Finance Ministry’s debt management office in Jakarta, said in a Jan. 30 interview.
The notes will be sold to Indonesian citizens and the minimum order set at 5 million rupiah, compared with the 1 billion rupiah limit for non-retail securities, he said.
The yield on the nation’s non-retail local-currency sukuk due 2017 was 8.36 percent yesterday, data compiled by Bloomberg show.
That compares with the 7.5 percent maximum interest rate guaranteed by Indonesia’s deposit insurance agency and the 8.5 percent coupon on non-Islamic debt sold to individual investors in October.
The finance ministry received 19 trillion rupiah of bids at its last retail sukuk sale in February 2013, which allowed it to offer a record-low rate for the debt, Dahlan Siamat, Islamic financing director at the debt office in Jakarta, said in an interview last year.
“Tapping the local retail base increases Indonesia’s chances of averting the current market turmoil,” Union Investment’s Dergachev said. “Appetite should be very good, irrespective of the fact that Indonesia is currently one of the fragile five countries.”
Indonesia’s rupiah was grouped with the currencies of Brazil, India, Turkey and South Africa in a Morgan Stanley research report last year because of the nations’ difficulties in attracting foreign capital to finance their deficits.
The rupiah plunged 21 percent in 2013, the most among the five nations, as Indonesia’s trade and current-account shortfalls swelled to records.
The Fed reduced its monthly bond purchases by $10 billion each in January and February to $65 billion. The U.S. monetary authority will continue cutting the stimulus and end it no later than December, according to economists surveyed by Bloomberg on Jan. 10.
The average yield on emerging-market local-currency sovereign debt climbed six basis points last week to 5.64 percent, Bloomberg indexes show.
The yield fell to 5.57 percent today, paring its three-month gain to 29 basis points.
Inflows Persist Overseas funds have still been adding to their holdings of Indonesian local-currency notes, buying a net 43.22 trillion rupiah in the six months through Jan. 28, according to finance ministry data.
“There are external pressures coming from tapering and emerging markets, but we have yet to see any pressure on Indonesia because we’re still seeing bond inflows,” Nik Mukharriz Muhammad, a Kuala Lumpur-based fixed-income analyst at CIMB Investment Bank, a unit of Malaysia’s second-largest lender, said in a Jan. 29 interview. “So demand for the retail sukuk shouldn’t suffer.”
Worldwide sukuk sales have slowed to $3.3 billion so far in 2014, compared with $3.8 billion in the same period last year, data compiled by Bloomberg show.
Issuance reached an all-time high of $46 billion in 2012. ‘Ample Demand’ Inflation in Indonesia was 8.22 percent in January, slowing from 8.38 percent in December, official data showed yesterday.
Southeast Asia’s largest economy expanded 5.37 percent in the fourth quarter from a year earlier, which would be the slowest pace since 2009, according to the median estimate in a Bloomberg survey before a report due Feb. 5.
Indonesian Islamic banks will probably reach 7 percent market share by the end of this year, from 4.8 percent in November, Edy Setiadi, head of Shariah banking department at Indonesia’s Financial Services Authority, said in a Jan. 30 interview in Jakarta.
The resulting increase in the amount of funds that need to be invested in assets that comply with the religion’s ban on interest will support sukuk sales, he said.
“The government may have to pay up but there should still be ample demand for its higher-yielding paper among retail investors,” Nicholas Spiro, managing director of investment consultancy Spiro Sovereign Strategy in London, said in a Jan. 29 e-mail interview. “This is about making use of all available funding sources at a time when sentiment toward emerging markets has deteriorated dramatically."