T

he government raised about Rp 1.05 trillion (US$108 million) from the sales of Islamic bonds (sukuk) on Tuesday, lower than its initial target of Rp 1.5 trillion, as investors held back from entering the sharia bonds market on fears that the recent depreciation of rupiah may spark inflation.

Total incoming bids for the sukuk topped Rp 2.26 trillion, far lower than the Rp 4.1 trillion that the Finance Ministry’s debt management office received during the last sukuk auction on Feb. 5.

In Tuesday’s auction, the government offered four types of sukuk; 5-year, 9-year, 14-year and 24-year debt papers. However, only the 5-year and 24-year notes were sold. The remainder did not receive bids matching the government’s estimates, said Dahlan Siamat, the director of Islamic financing policy at the Finance Ministry’s debt management office.

He attributed the low bids to the government not offering sharia treasury bills that are usually in high demand among foreign investors. Sharia t-bills, which have a maturity period of six months, received Rp 2.07 trillion of bids during the auction on Feb. 5.

Bid-to-cover ratio, a measurement of a bond’s demand among investors, for the 5-year and 24-year bonds stood at 1.98 and 1.19, respectively, indicating that investors opted for short-term sukuk.

Meanwhile, the weighted average yield for the 5-year and 24-year notes rose by 0.02 percent and 0.01 percent, respectively, compared to the last auction on Feb. 5.

Analysts attributed the yields hike to higher inflation expectations among investors, on the back of fears that the increase in electricity tariff and minimum wage will trigger price increases in the coming months, and rupiah depreciation would spark imported inflation.

 “Investors may have some fears that the weakening trend of the rupiah might persist,” Herdi Ranu Wibowo, the head of debt capital market of BCA Sekuritas, said Tuesday when asked why investors are seeking higher yield for sukuk during the auction.

The government plans to raise Rp 270 trillion from bonds this year to plug its budget deficit, with sukuk accounting for Rp 57 trillion of the amount. This year, the government also plans to use infrastructure projects as underlying assets for the sukuk to attract more investor.

In its effort to diversify its Islamic-based financial instruments, since February the government already started selling the retail sukuk that offer an interest rate of 6 percent per year. The retail sukuk carries face value of between Rp 5 million to Rp 5 billion and has a three-year tenor maturing on February 2016.

Indonesia’s bonds rose, pushing the two-year yield on Tuesday to the lowest in a year, as official
data showed foreign investors quickened purchases of the nation’s debt. Rupiah forwards declined for a fourth day.