The Indonesian government reaped $1.5 billion from the sales of high rate US dollar-denominated Islamic bonds on Wednesday to boost the country’s depleting foreign reserves.
The yield of the Islamic bonds — commonly known as global sukuk — was the highest since the government first issued the notes in 2009, according to the Finance Ministry’s debt management office.
The issuance of the sharia compliant bonds was more than three times oversubscribed, with incoming bids topping $5.6 billion from around 300 investors, most of which come from Asia (25 percent), the US (24 percent), and Middle East (20 percent).
The global sukuk will mature March 2019, offering yield of 6.1 percent, far higher than the 3.3 percent yield that the government paid for the 10-year notes during the last sales of Islamic dollar bonds in November last year.
By selling the global sukuk with yields of 6.1 percent, the government already performed “price tightening” as its initial yields estimate had been 6.3 percent, said Dahlan Siamat, the director of Islamic financing policy at the Finance Ministry’s debt management office.
“When issuing bonds, there needs to be compromise between the government and investors, we want low yields, but they want high returns,” he said. “The latest yield for the global sukuk is a fair price for both the Indonesian government and investors,” the official added.
The latest global sukuk issuance was the latest attempt by Indonesia to boost foreign exchange (forex) reserves, add more dollars in the local market and restore confidence for the rupiah.
Bank Indonesia’s (BI) forex reserves, used by the central bank to supply dollars for both imports and debt payment, stood at $93 billion by the end of August, its lowest level in more than two years.
Since the beginning of this year, the forex reserves have depleted by $19.8 billion, or 17.8 percent, as BI intervened heavily in the market to support the rupiah, which has been under pressure as foreign fund outflows from the local equity and debt markets have widened deficit in Indonesia’s current account.
Finance Minister Chatib Basri said Tuesday that the government would sign swap agreements with at least two central banks this quarter to give Indonesia access to utilize standby funds of about US$30 billion to protect and boost forex reserves.
“We need dollars to improve the position of our balance of payments,” said Dahlan. “The dollars [from the sales of global sukuk] would also increase our forex reserves, ultimately improving market’s confidence.”
However, the issuance of dollar bonds might come at high costs, as the high yields and recent weakening cycle of the rupiah will put heavy burden on Indonesia’s debt payments, analysts have said.
For a dollar bond that matures in 5.5 years, the 6.1 percent yield was “quite high”, according to I Made Adi Saputra, a fixed income analyst with PT Nusantara Capital.
“The government is giving quite high yields because some investors are still spooked by the possibility of tighter global liquidity ahead, as the US central bank would soon taper its monetary stimulus,” he said, adding that such a situation also caused investors to avoid risks.
Indonesia’s global sukuk was rated as the lowest level of investment grade by international ratings.
