Indonesian two-year sukuk, or the Islamic equivalent of bonds fell last month, pushing up yields by the most since September, as Standard & Poor’s, kept the nation’s credit rating at junk after the government maintained fuel subsidies.
Yields on sovereign 8.8 percent Shariah-compliant dollar-denominated bonds due April 2014 climbed 39 basis points to 2.92 percent on April 30, according to data compiled by Bloomberg.
That compares with a 17 basis point drop in yields on Malaysia’s 3.928 percent global sukuk due 2015. The government’s inability to pare spending on energy subsidies will boost the budget deficit to 3.5 percent of gross domestic product, from 1.3 percent last year, President Susilo Bambang Yudhoyono said last week.
S&P didn’t join Moody’s Investors Service and Fitch Ratings, which have granted Indonesia investment-grade status in the past five months, saying the nation is at risk from “policy slippages” such as the failure to reduce the fuel subsidies.
“Rising yields is what we get because of the stalling on fuel policy,” Herbie Mohede, a Jakarta-based portfolio manager at PT Samuel Aset Manajemen, said in an April 27 interview.
“If fuel prices are raised, a big uncertainty over the inflation risk will be erased from the market and the government will have more funds for infrastructure.” Higher yields make it more expensive to sell debt as the Finance Ministry targets Rp 40 trillion ($4.4 billion) of Islamic bond sales this year, up from 34 trillion rupiah in 2011.
Sales Target Increased the yield premium demanded on Indonesia’s 4 percent global Shariah-compliant bonds due in Nov. 2018 over Malaysia’s 3.928 percent dollar sukuk due 2015 widened 36 basis points, or 0.36 percentage point, to 198 basis points last month, according to data compiled by Bloomberg.
A government report today may show consumer prices increased 4.46 percent in April from a year earlier, which would be the fastest since September, according to the median estimate of 17 economists surveyed by Bloomberg.
The government may cut spending in order to maintain the deficit at the legal maximum requirement of 3 percent, Yudhoyono said last week. The nation raised its 2012 bond sales target, including sukuk and non-Islamic securities, to Rp 159.6 trillion in the revised budget approved in March, from a previous goal of Rp 134.6 trillion, according to the Finance Ministry’s debt management office.
“The price has corrected because investors see an oversupply,” Akbar Syarief, a Jakarta-based fund manager at PT MNC Asset Management, who helps oversee Rp 1.7 trillion of assets, said in an April 27 interview. “Because fuel prices weren’t raised, the government has a greater need to issue more debt.”
Trading Activity Global sales of securities that comply with Islam’s ban on interest reached $13.3 billion this year from $5.8 billion a year earlier, according to data compiled by Bloomberg. Sales amounted to a record $36.3 billion last year.
Indonesia has been selling Shariah-compliant bonds almost every two weeks since January as it seeks to boost trading activity, prompting the spread over non-Islamic debt to shrink. The yield premium that investors demand on the 8.8 percent sukuk due 2014 over 10.375 percent securities due in May 2014 was 37 basis points on April 30, from last year’s high of 59 basis points on Oct. 20, according to data compiled by Bloomberg.
“As liquidity improves, we expect the price to become more aligned with conventional bonds,” Teddy Satriadi, head of fixed income at PT Bank Negara Indonesia in Jakarta, said in an April 30 interview. “There is no reason for the sukuk yield to be far above the conventional as the risk profile is identical.”
Inflation Forecast Islamic securities worldwide returned 3.1 percent in 2012, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while emerging-market debt gained 6.4 percent, JP Morgan Chase & Co.’s EMBI Global Composite Index shows.
Average yields on Shariah-compliant debt declined three basis points to 3.59 percent last month through April 27, according to the HSBC/Nasdaq index. The difference between the average yield and the London interbank offered rate, or Libor, narrowed five basis points to 243 basis points.
Lawmakers turned down the administration’s bid to boost fuel prices by 33 percent on March 31, a move that would have resulted in inflation of 6.6 percent in 2012, Bank Indonesia Governor Darmin Nasution forecast. The Southeast Asian nation is now proposing to restrict subsidized gasoline sales from this month.
Perry Warjiyo, director for economic and monetary-policy research at the central bank, predicted on April 23 this would result in consumer-price gains of 4.7 percent this year. “Yields will remain near this level for the next one or two months as long as the fuel policy hasn’t been decided on,” MNC Asset’s Syarief said.
“Yields would surge if fuel prices are raised and inflation quickens, but not for long as investors would see it as a time to return to the market.”