Indonesia Tempts Households With Sukuk Premium
Indonesia is offering sukuk to individuals at the highest premium over existing securities in two years as it seeks to lure funds away from deposits and reduce reliance on overseas investors.
The Finance Ministry plans to sell about Rp 20 trillion ($1.6 billion) of three-year Shariah-compliant retail bonds paying 8.25 percent at its regular annual sale, and will market the debt from Feb. 23 to March 6, according to a Feb. 18 statement. The yield is 55 basis points more than that for similar outstanding sukuk and lower than the average 8.39 percent on one-year deposits from Islamic lenders, Financial Services Authority (OJK) data show.
The government has expressed concern that the level of foreign ownership of bonds makes the nation vulnerable to capital outflows, particularly after the central bank unexpectedly cut interest rates this month for the first time since 2012. Global investors have boosted holdings of Indonesian sukuk and non-Islamic debt to a record 40 percent of all tradable rupiah securities, according to the Finance Ministry.
“The benefit of selling retail sukuk is twofold in that it balances out the foreign holdings and improves Islamic finance awareness,” Handy Yunianto, head of fixed-income research at Mandiri Sekuritas, a unit of the nation’s largest lender by assets, said by phone from Jakarta on Feb. 18. “The government has to compete with deposit rates, which are still high.”
Lower deposits
The government sold a record Rp 19.3 trillion of Shariah-compliant retail bonds at the last offering in February 2014, exceeding the 18.5 trillion goal as bids totaled Rp 19.4 trillion. The premium it’s giving this time is the biggest since the 1.5 percentage points in 2013 that equated to a yield of 6 percent.
Indonesia is attracting overseas funds with 10-year bond yields at 7.19 percent, the highest among 13 Asian nations after India’s 7.69 percent, data compiled by Bloomberg show. Monetary easing in developed economies from Japan to the European Union is also bolstering demand as the Federal Reserve prepares to raise interest rates.
Bids at this year’s three auctions of regular Islamic bonds from Indonesia have averaged 7.4 times the amount available, exceeding the 2.2 level for all of 2014, according to Finance Ministry figures. Investors submitted Rp 11.6 trillion of orders on Feb. 10 and an unprecedented Rp 19.1 trillion on Jan. 27.
Local lenders may seek to lower their deposit rates after Bank Indonesia cut benchmark borrowing costs by 25 basis points to 7.5 percent on Feb. 17, reversing an increase made as recently as November.
Sale boon
“The rate cut was a boon for the retail sale,” Dian Ayu Yustina, economist and fixed-income analyst at Bank Danamon Indonesia, said by phone Feb. 18. “The government is frontloading sales before Fed rates rise, so it needs to make sure it doesn’t oversaturate any one market.”
Indonesia is raising funds from individuals to diversify the investor base and ensure it can meet financing plans amid the uncertain global economic outlook, Robert Pakpahan, director-general at the financing and risk management office, said at a briefing in Jakarta Feb. 20. The government plans to sell Rp 79 trillion of Islamic bonds this year, which includes the retail notes and a dollar-denominated offering in the first half, he said.
Globally, sales of Shariah-compliant debt are off to the worst start to a year since 2010, totaling $1.7 billion, according to data compiled by Bloomberg. Issuance was $46.3 billion last year, short of the all-time high of $46.8 billion in 2012.
‘Less risky’
Indonesia’s planned retail sukuk will be the government’s seventh since the debut in 2008. Last year’s offering was taken up by 34,692 investors, almost double the 17,783 that participated in the 2013 sale, Finance Ministry data show.
“Retail sukuk is very expensive,” I Made Adi Saputra, fixed-income analyst at BNI Securities, a unit of the nation’s fourth-largest bank, said by phone on Monday. “But it’s beneficial in the long run, as having a solid domestic investor base is less risky and will consequently lower borrowing costs.”
Bloomberg
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