Indonesia has raised more than US$5.8 billion through Sukuk issuance, but virtually all has been from domestic financial institutions in local currency. Last year the ministry of finance announced that it was planning to raise US$650 million through a sovereign Sukuk aimed at the Middle East investors, but this is unlikely to go ahead this year because of domestic developments and the uncertain situation now prevailing in the Middle East since the uprisings.
Indonesia’s economy has performed well during the last year. Growth projections have been raised to the 6% to 6.5% level and there was a substantial balance of payments surplus amounting to US$11.3 billion for the last quarter of 2010. Debt servicing should therefore not be a problem. The negative factor is inflation, which currently exceeds 7%. Consequently bond yields have risen substantially, exceeding 4.5% for those maturing in 2017, the likely maturity date for the Sukuk. The Sukuk has been postponed simply because the funding now looks expensive. The events in Bahrain, the major centre in the Gulf for Islamic finance, are starting to worry Gulf investors. Putting deals together in Bahrain for Sukuk or anything else in the coming weeks looks increasingly problematic. Once confidence is lost, it is not easily restored, and Islamic finance deal making is likely to mark time. At present, it is clearly not the time to be raising Sukuk funding. PROFESSOR RODNEY WILSON The reason for the original delay of the Indonesian government Sukuk issue from October 2010 to the first half of 2011 was cited to be the lower budget deficit and associated reduction in government borrowing needs. Not issuing debt in the event it is not required makes economic sense and shows a cautious approach to borrowing which should be applauded. The reason cited for the current delay from the first to the second half of 2011, is the fact that parliamentary approval is required to use the underlying assets for the issue. In some way this appears slightly odd. The issuance had, after all, been announced some time ago, and one might be excused for wondering why the approval had not been sought earlier. It is, however, not unimaginable that the reason for the continued delay has something to do with the fact that the most recent issue did not attract sufficient interest from investors. Whether Indonesia will issue government Sukuk this year will remain to be seen, and is likely to be strongly associated with investor appetite. DR NATALIE SCHOON Head of product research, Bank of London and the Middle East While there are a number of reasons for a sovereign to issue a global Sukuk, the principal motivation is usually to raise external financing on attractive terms. On that basis, it is not really a surprise that Indonesia did not proceed with a Sukuk issuance last year as it had already issued a jumbo US dollar bond last January followed by an attractively priced Samurai bond later in the year, and its strong fiscal position meant it had only limited need for external financing. Whether an issuance takes place this year will presumably depend on similar motivations. One only needs to look at the Indonesian government’s robust and regular domestic Sukuk issuance program to see that it is highly committed to Sukuk when it makes sense as a funding source. HOOMAN SABETI Partner, Allen & Overy |