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Jakarta Post

Indonesia plans $2b sukuk issue to fund infrastructure projects

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Thu, January 21, 2021   /   01:53 pm
Indonesia plans $2b sukuk issue to fund infrastructure projects A worker walks along the runway of a tower crane on July 29, 2020 at the site of an integrated construction project at Soekarno-Hatta International Airport in Tangerang, Banten. (JP/Dhoni Setiawan)

The government plans to issue sukuk (sharia-compliant bonds) worth Rp 27.58 trillion (US$1.96 billion) this year to finance the country’s costly infrastructure projects and spur economic growth, a Finance Ministry official has announced.

It will use the proceeds to finance 870 development projects to be managed by 11 ministries, including the Transportation Ministry, the Defense Ministry, as well as the Public Works and Housing Ministry (PUPR), the Finance Ministry’s financial risk management director general Luky Alfirman told a Cabinet meeting on Wednesday.

“The biggest allocation would be [made to] the transportation sector, as the Transportation Ministry and the PUPR are tasked with strengthening connectivity and logistics in 2021,” Luky said. He added that the funds would go toward infrastructure projects such as national parks, bridges, laboratories, schools and airports.

The government’s sukuk issuance plan is part of a broader effort to raise around Rp 1 quadrillion to help revive the coronavirus-battered economy and to finance the fiscal deficit, which is expected to reach 5.7 percent of gross domestic product (GDP) this year. Finance Ministry data show that the 2020 fiscal deficit reached 6.09 percent, more than twice the initial deficit cap of 3 percent, as the pandemic spurred government spending and sapped tax revenue.

Read also: Budget deficit projected to reach 5.7 percent of GDP in 2021 as uncertainty hits tax revenue

Luky said the government had also spent 91 percent of the Rp 23.29 trillion raised from sukuk to finance infrastructure spending in 2020, when the economy plunged into a recession for the first time in two decades. It had earmarked Rp 414 trillion in the 2021 state budget for construction and infrastructure projects.

The National Development Planning Agency (Bappenas) estimates that the country will need infrastructure investments in 2020-2024 of around US$429.7 billion, equal to 6.1 percent of GDP.

However, PUPR officials suggested earlier that the government could finance just 30 percent of the projects using the state budget.

Read also: Govt to offer 25 PPP projects worth Rp 278.35 trillion next year

Finance Minister Sri Mulyani Indrawati stressed that governance and accountability were essential to ensuring the proper use of the sukuk funds, as well as to avoid corruption.

“Our state budget is under immense pressure during this pandemic, so we need creative financing like sukuk,” Sri Mulyani told the same meeting.

“Indonesia will become a more influential player in global sharia financing as the [trading] volume grows,” she said, adding that the sukuk issuance would also expand the country’s sharia finance products.

Fixed income analyst Ramdhan Ario Maruto of Anugerah Sekuritas Indonesia told The Jakarta Post on Wednesday that the sukuk would be attractive to foreign investors, as Indonesia offered higher yields compared to other ASEAN states.

“But the increase in coronavirus cases in recent weeks is cause for concern among investors and may limit the demand for sharia bonds,” he said. “Therefore, the vaccination [drive] is crucial to supporting the country’s financial markets.”

The country recorded more than 12,500 new COVID-19 cases on Wednesday, bringing the national tally to almost 940,000 cases.

The government has secured 426.8 million doses of COVID-19 vaccines in an effort to end the pandemic and get the economy moving. The majority of the vaccine supply consists of CoronaVac by Chinese biopharmaceutical company Sinovac Biotech, and the remainder is from American vaccine manufacturer Novavax.

Indonesia aims to vaccinate around 181.5 million citizens to achieve herd immunity. The country’s nationwide inoculation program, which involves 8,796 registered medical facilities, commenced on Jan. 13 with President Joko Widodo becoming the first to receive a dose.