T

he government has raised the highest ever amount from a single sukuk auction, with one of the sukuk series more than 11 times oversubscribed in the latest offering, underscoring the strong investor demand in the country'€™s largely untapped Islamic financial instrument.

The first sukuk auction this year, held on Tuesday, attracted incoming bids of Rp 13.7 trillion (US$1.1 billion), the most in history, representing a more than sixfold oversubscription, the government having set an issuance target of Rp 2 trillion.

In response to the high demand, the Finance Ministry then decided to upsize the issuance, selling Rp 6.8 trillion of sukuk bonds.

The robust demand in the latest sukuk auction was unexpected as sukuk debt papers, which comply with sharia-based investment principles, were known for their illiquid nature in the financial market, with a lack of daily trading volume.

In comparison, incoming bids in the previous sukuk auction on Oct. 21 barely reached Rp 3.5 trillion.

'€œThere is ample liquidity in the market, which translates into strong incoming bids in the auction,'€ Suminto, the newly appointed director general of sharia financing in the Finance Ministry'€™s debt management office, said on Wednesday.

Nevertheless, Suminto said that the government would first assess upcoming auction results before deciding to raise more financing from sukuk this year.

'€œThis might be just a '€˜January effect'€™,'€ he said, referring to the seasonal phenomenon whereby the demand for portfolio investments rises after the market'€™s long closure for the year-end holiday.

The most in-demand debt paper during the latest auction was the short-tenor sukuk. Incoming bids for the six-month sukuk treasury bills (T-bills) and for the one-year sukuk exceeded Rp 5 trillion each.

The six-month sukuk T-bills were more than 11 times oversubscribed, as their bid-to-cover ratio
stood at 11.2.

Meanwhile, the weighted average yield for the six-month and one-year notes stood at 6.32 percent and 7.46 percent, respectively. The government also sold 5-year and 15-year sukuk with yields of 7.89 and 8.62 percent, respectively.

The yield of the sukuk notes in the most recent auction offered attractive returns for both domestic and foreign investors, said Adra Wijasena, a fixed-income analyst with Mega Capital Indonesia.

He noted that the strong incoming bids were supported by new instruments, such as the 1-year sukuk. Investors sought such a type of bond because when a new financial instrument was issued, its price typically soared in following weeks, he explained.

'€œDiversifying the financial instruments is beneficial for local companies, which have the benchmark when they plan to raise capital through sukuk,'€ Adra said on Wednesday. '€œFor companies relying on conventional bonds [for financing], issuing sukuk is one way to diversify their risks.'€

As of Jan. 9, total outstanding sukuk in the secondary market stood at Rp 143 trillion, a miniscule amount compared with Rp 1.2 quadrillion in conventional bonds (SUN).

Meanwhile, foreign investors held 6.7 percent of rupiah sukuk in the secondary market, compared with 38.1 percent in conventional rupiah bonds.

Besides selling rupiah sukuk, the government also plans to issue dollar-denominated sukuk in the first half this year, having successfully raised $1.50 billion from global sukuk in 2014.