Indonesia Rating Bets Drive New Sukuk Demand: Islamic Finance

By webadmin on 12:44 pm May 19, 2011
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Khalid Qayum & Suryani Omar

Speculation Indonesia’s credit rating will be raised to investment grade may drive demand for the government’s second sale of global Islamic bonds. 
“I’d be interested because there’s the possibility of an investment-grade rating,” Mohd Noor Hj A Rahman, chief executive officer at Kuala Lumpur-based OSK-UOB Islamic Fund Management Bhd., said in an interview May 12. “Indonesia is a big market with potential for economic growth.” 
Standard and Poor’s signaled last month it may raise the sovereign debt rating to investment grade after changing the outlook on Indonesia’s debt to positive, citing strength in the economy, which the government expects to grow up to 6.5 percent in 2011, the fastest pace in seven years. An upgrade would open up a larger pool of investors for the securities, according to Union Investment Privatfonds in Frankfurt, OSK-UOB Islamic Fund Management and Al Baraka Banking Group BSC in Manama. 
The nation may sell dollar sukuk early in the second half of the year, Jakarta-based Rahmat Waluyanto, director general at the Finance Ministry, said in an interview May 11. Investors say the bonds also may provide extra yield, with the five-year Shariah notes sold in April 2009 offering a premium of 39 basis points, or 0.39 percentage point, more than similar-maturity debt in Malaysia, prices from Royal Bank of Scotland Group show. 

Default Swaps 

Indonesia, whose debt is rated one step below investment grade by SandP, sold $2.5 billion of 10-year non-Islamic dollar debt on April 27, attracting bids for almost three times the amount on offer. The government expects to reach investment grade this year, Vice Finance Minister Anny Ratnawati told reporters on April 14. 
The cost of protecting Indonesian government bonds from default for five years rose to a three-week high of 137 on May 17. Credit-default swaps on the debt climbed four basis points this month to 135 yesterday, according to data compiled by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. 
SandP raised Indonesia’s credit rating to BB+ from BB on April 8. Moody’s Investors Service lifted its ranking to Ba1 on Jan. 17, citing the “economic resilience” and improving debt position. Fitch Ratings assessed the nation at BB+. 
The government sold $650 million of the five-year 8.8 percent Islamic bonds maturing in April 2014 at the last offering, receiving bids for $4.7 billion. The debt was issued to yield 705 basis points more than U.S. Treasuries. The spread has since narrowed to 190 basis points, according to data compiled by Bloomberg. 
Demand drove the rate on the notes down 19 basis points in 2011 to 2.94 percent, the lowest since Jan. 5. 
Indonesia ‘Exposure’ 

The difference in yield between the Indonesian sukuk and Treasuries may shrink another 25 basis points to 30 basis points, according to Sergey Dergachev, who helps manage $9.6 billion of emerging-market bonds as a senior portfolio manager at Union Investment. The yield on the note will “stay low” so long as there’s no “global crisis event,” he said. 
“I would certainly look at a new dollar-sukuk issue,” said Dergachev in an interview on May 12. “Investment grade will most likely be granted from at least one agency in 2011. More accounts that couldn’t purchase Indonesian bonds due to rating constraints will now put in their money to get exposure to Indonesia’s story.” 
Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, reached $5.9 billion this year, from $5.4 billion in the same period last year, according to data compiled by Bloomberg. 

Accelerating Growth 

Shariah-compliant bonds gained 4.8 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets rose 3.8 percent, JPMorgan Chase and Co.’s EMBI Global Diversified Index shows. 
The difference between the average yield for sukuk and the London interbank offered rate narrowed eight basis points to 242 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped three basis points to 4.06 percent. 
Growth in Indonesia, Southeast Asia’s biggest economy, may reach the upper end of the forecast range of 6 percent to 6.5 percent in 2011, Bank Indonesia said in a statement May 12. Gross domestic product increased 6.1 percent in 2010, the most in six years. Consumer prices climbed 6.16 percent in April from a year earlier, the least in six months, official data showed on May 2. 
The government’s April sale of 4.875 percent non-Shariah- compliant bonds due May 2021 attracted bids of $6.9 billion. The debt was sold to yield 5.1 percent. The rate fell three basis points to 4.81 percent today, according to data compiled by Bloomberg. 

‘Attractive Yield’ 

Malaysia issued a dollar sukuk in May last year, its first global offering in eight years. The yield on the 3.928 percent note due in June 2015 rose one basis point to 2.46 percent today, RBS prices show. The difference in yields between Malaysia’s sukuk and the Dubai Department of Finance’s 6.396 percent note due in November 2014 shrank eight basis points to 231 yesterday, according to Bloomberg data. 
The Bloomberg-AIBIM-Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded ringgit-denominated government securities, was at 102.403 yesterday. The gauge has gained 1.3 percent this year. 
Sales of local-currency sukuk reached 17.94 trillion rupiah ($2.1 billion) this year, approaching the 27.76 trillion rupiah in 2010, according to combined data from the debt management office and the Capital Market and Financial Institution Supervisory.

Overseas investors raised holdings of Indonesia’s rupiah debt by 15 percent to 225.4 trillion rupiah this year as inflation cooled, according to Finance Ministry data on May 18. 
“Pricing for sukuk issued out of Indonesia will reflect a risk premium that results in an attractive yield for Gulf Cooperation Council investors,” Malek Khodr Temsah, assistant vice president of treasury and investments at Manama-based Al Baraka Banking Group, said in an interview May 9.