High-Yield Sukuk Rally on Rupiah’s Seven-Year High, Easing Inflation

By webadmin on 08:56 pm Jun 10, 2011
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Elffie Chew & Suryani Omar

Indonesia’s Islamic bonds are rallying, sending yields to a five-month low, as slowing inflation and a strengthening rupiah allow the central bank to refrain from raising borrowing costs.

The rate on the 7.36 percent rupiah note maturing in August 2014 dropped 58 basis points since Jan. 5 to 6.33 percent, near the low of 6.3 percent on June 6.

The rupiah reached 8,499 per dollar on June 8, the strongest level since March 2004. It rose 5.9 percent in the past six months, the second-best performance among Asia’s 10 most-active currencies excluding the yen.

Indonesia’s sukuk yields 283 basis points, or 2.83 percentage points, more than similar-maturity notes in Malaysia, making the debt attractive, according to Kuala Lumpur-based Asian Islamic Investment Management.

Bank Indonesia said after holding rates unchanged on Thursday that inflation will range between 4 percent and 6 percent this year.

“The Indonesian sukuk is sitting on a sweet spot because it offers one of the highest yields in Asia,” said Chan Cheh Shin, who helps oversee $3 billion of assets as chief investment officer at Asian Islamic Investment Management. “The fact that the country has improved its image on the international radar also helps.”

Average yields on global Islamic bonds dropped 92 basis points in 2011 to a six-year low of 3.82 percent, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between the average yield for sukuk and the London interbank offered rate narrowed 51 basis points to 239.

Investor sentiment in Indonesia is improving after the nation’s foreign-exchange reserves climbed to a record $118 billion in May. The holdings were as little as $18 billion in April 1998 during the Asian financial crisis that sent the rupiah to a low of 16,950 to the dollar in June that year.

Growth in the $540 billion economy, Southeast Asia’s largest, may reach the upper end of the central bank’s forecast of 6 percent to 6.5 percent this year. Gross domestic product increased 6.1 percent last year, the fastest pace in six years.

Indonesia’s local-currency government bonds returned 6.3 percent this year, the most among 10 regional markets, according to indexes compiled by HSBC Holdings. That’s more than three times the 1.6 percent delivered by Malaysia, which has the world’s biggest market for sukuk.

The Finance Ministry is awaiting approval from the legislature to use Rp 30 trillion ($35.2 million) of state-owned land and office buildings as underlying assets to back sukuk and increase issuance, according to Dahlan Siamat, director of Islamic finance at the debt management office.

Standard & Poor’s signaled in April it may raise the sovereign debt rating to investment grade after changing the outlook on the debt to positive, citing strength in the economy.