The Jakarta Post
The government is hoping that Indonesia’s huge Muslim population will boost demand for its sharia-compliant debt paper, also known as sukuk, and help develop the financial market.
It recently issued its latest retail sukuk called the SR-011, which offers a yield of 8.05 percent annually. The yield, however, is slightly lower than the 8.15 percent offered in the previous sukuk issuance, the ST-003.
The government decided to set a lower yield as the financial market is bullish despite Bank Indonesia (BI) keeping its benchmark interest rate – the seven-day reverse repo rate – at 6 percent and the United States Federal Reserve adopting a dovish stance this year.
“The bullish market prompted bond yields to go down, resulting in the return on the retail sukuk falling as well,” said Luky Alfirman, director general of financing and risk management at the Finance Ministry.
The lower return, he said, would ease the burden on the state budget.
Aside from lowering the yield, the government set a lower target for the issuance as it expects to rake in at least Rp 10 trillion (US$698.5 million), only half of the target of Rp 20 trillion in 2017, when it issued the SR-009 series.
However, Luky said he was hopeful that the latest sukuk series, the last offer date of which is scheduled for March 21, would exceed its target in order to help plug the state budget deficit.
Bank Mandiri quantitative analyst Reny Eka Putri told The Jakarta Post that Luky’s optimism would most likely prove well founded as the previous issuances of retail bonds managed to reap more money than the government’s indicative target.
For example, the conventional retail saving bond of SBR005 managed to book Rp 4 trillion from retail investors, while the sharia-compliant ST-003 booked a total of Rp 3.13 trillion. Both of those notes exceeded their indicative target of Rp 2 trillion each.
“The current market condition is quite favorable for the sukuk as macroeconomic conditions are far better than last year,” she added.
This year, she said, the market was moving toward a bullish state where the rupiah, the Jakarta Composite Index (JCI) – the main gauge of the Indonesia Stock Exchange (IDX) – and bond market were a lot stronger than last year as a result of stable global conditions.
Aside from plugging the deficit, Luky said the issuance of the retail sukuk was expected to help widen Indonesia’s retail investor base and reduce the dependence on foreign funds to finance the state budget.
He hoped that the sukuk issuance could increase activities in Indonesia’s financial market, particularly the sharia-compliant sector.
The growing popularity of sukuk in the global financial market and Indonesia being the largest Muslim-majority country inspired the government alongside House of Representatives to issue a law on sharia-compliant sovereign debt papers in 2008.
Since then, the sukuk market has grown rapidly with the government issuing sovereign sukuk, regular retail sukuk and project-based sukuk. Most recently, Indonesia listed a total of $2 billion of global regular and green sukuk at the Singapore Stock Exchange and NASDAQ Dubai in the United Arab Emirates.
Corporations have also joined the trend by issuing sukuk to fund their expansion or refinance their debts, such as telecommunication companies XL Axiata and Indosat, both of which have listed their sukuk on the IDX.
Nonetheless, Reny of Bank Mandiri said, the sukuk market in Indonesia was not growing as fast as its conventional counterpart, as corporations and most Indonesian investors were still unfamiliar with the instrument.
That was why she thought that the government, along with banks and financial services firms as sukuk distribution agents, should promote and raise greater awareness about the instrument, particularly in the eastern part of the country.
“This product [sukuk] has great potential, not only because it’s interesting for Muslims but also for domestic investors in general as sukuk offer more choices for them and they deepen our financial market,” she said.