The Jakarta Post
Credit rating agency Moody’s Investors Service expects Indonesia’s sukuk (Islamic debt papers) issuance to increase to US$27 billion this year, from $16 billion last year, as the government seeks more financing to fund the fight against the COVID-19 pandemic.
Moody’s sovereign risk group lead analyst Thaddeus Best said on Tuesday that he expected Indonesia’s sukuk issuance to increase by about 68.75 percent as the government unveiled a Rp 695.2 trillion (US$47.3 billion) stimulus package to fight the pandemic.
“This is based on the assumption of an increase in financing to fund the fight against COVID-19,” he said during a webinar on global Islamic finance and sukuk.
To help fund the package, the government is planning to raise Rp 900.4 trillion in the second half of this year to cover for a widening budget deficit of 6.34 percent of gross domestic product (GDP) this year.
He speculated that economic stimulus measures and eases in lockdown in many countries around the world helped to improve secondary market spreads for sukuk.
The option-adjusted spread of Indonesia’s US dollar-denominated government sukuk had fallen to almost 150 basis points (bps) as of July compared to its highest spread of 400 bps in March.
Meanwhile, oil exporting countries such as Saudi Arabia and Qatar would need to increase their borrowing requirements significantly due to lower prices of oil, which contributes a large portion of both countries’ revenue.
Sukuk-issuing countries such as Malaysia and Turkey, much like Indonesia, would also see a significant increase in funding needs as they need to finance their widening budget deficit to provide financial assistance to those impacted by the pandemic.
“We expect these reasons will cause sovereign sukuk issuance to rise by more than 40 percent to $94 billion in 2020,” said Best.
However, he expects that the proportion of sukuk in the funding mix of major issuers will decline this year due to the preference for conventional bond issuance over sukuk during the height of the pandemic in the second quarter of 2020.
Best projects the share of sukuk financing for Indonesia to decline to 24 percent this year as opposed to 34 percent in its initial projection in March.
The Finance Ministry’s director of sharia financing Dwi Irianti Hadiningdyah said on Wednesday that this year’s sukuk issuance would be higher than in 2019 as the government would need to finance the widening state budget and the national economic recovery program (PEN).
Finance Ministry data show that the government issued a total of Rp 236.82 trillion in domestic sukuk as of Aug. 6. The figure almost reached the amount of sukuk issuance in 2019, which was Rp 258.28 trillion.
The government in June also raised $2.5 billion from a three-tranche global sukuk offering aimed at helping the government fund the battle against the pandemic. The issuance was oversubscribed by $16.66 billion, or 6.7 times its target, reflecting a relatively strong international investor appetite for the instrument.
Despite the successful global sukuk issuance, Dwi said the government would no longer issue global sukuk in the second half of this year and would focus on domestic issuance instead.
“The domestic market can still fulfill the remainder of our financing need. This is proven from a high bid-to-cover ratio of four to six times on every auction,” she told The Jakarta Post.
As for the overall sukuk issuance this year, Moody’s vice president and senior credit officer Nitish Bhojnagarwala said he expected a modest decline of 5 percent to $170 billion globally this year despite the coronavirus outbreak.
His projection was based on a 12 percent drop in issuance during the first six months of this year due to restrained mobility in Malaysia and Indonesia to curb the spread of the pneumonia-like illness.
“The outbreak reduced private sector activity in Southeast Asia, including Indonesia, which resulted in slumping issuance,” he said.
Bhojnagarwala, however, expects sukuk issuance volume to rebound in the second half of this year. The increase would primarily be driven by sovereign issuance.
He believes the global sukuk market to have long-term potential as the current crisis could encourage potential new issuers, both sovereign or corporate, to consider access to the market to find new funding sources.
The new issuers, he said, were expected to come from African countries such as Egypt, Algeria, Morocco and Sudan as those countries have shown interest in issuing sukuk.
Moreover, the rise of green sukuk initiatives would help to grow the global sukuk market in the long term.
“We also expect an acceleration of green sukuk issuance in Malaysia and Indonesia as both countries seek to attract private capital to low-carbon and climate-resilient infrastructure projects,” said Bhojnagarwala.
Green sukuk accounted for around 3 percent of sukuk issuance as of June, according to Moody’s. The latest issuance was a $750 million five-year instrument from the Indonesian government to finance sustainable projects.