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After delaying the sale from late last year at the height of the crisis, Southeast Asia’s top economy is looking to sell a benchmark 5-year dollar-denominated sukuk, said an investor being briefed on the sale but not allowed to talk publicly about it.
Indonesia is seen raising $500-$600 million via the sale, marking a first for the country that has the world’s largest Muslim population, as it scours markets to help plug a budget gap estimated at 2.5 percent of gross domestic product this year.
The country already raised $3 billion in dollar-denominated sovereign bonds in February and plans to sell up to $1.5 billion in Samurai bonds, or debt issued in Japan by foreign entities. These sales are putting Indonesia within sight of its goal to raise a total of about $9 billion this year.
“This is an attempt by Indonesia to say we want to be a player in the Islamic financial markets,” Raj M Maiden, managing director at Singapore-based consultancy firm Five Pillars.
“Is it the return of the sukuk? I think it is an attempt to bring it on,” he added. “The outlook is still a little bit unclear.”
There has been no sale of dollar-denominated sukuk this year in the once high-flying market. Issuance had already slumped to $1.9 billion last year from the record $10.3 billion sold in 2007, according to Thomson Reuters data.
Unlike conventional debt, sukuk pays returns derived from underlying assets, often in the form of assets such as real estate, given that Islamic law bans the payment of interest.
The global financial crisis has dented Gulf economies that had served as an investor base for these products, while a property downturn in cities such as Dubai have further led to the slowdown in Islamic bond sales.
Still growing interest from Asia to target a previously untapped market is offering some hope.
Thailand could sell its maiden and long-awaited global Islamic bond this year, while private issuers, such as South Korean oil refiner GS Caltex, are also eyeing the market.
It is not clear though, whether those sukuks would be issued in dollars or some other currency.
Indonesia is getting closer to its full year target of raising around 100 trillion rupiah ($9.15 billion) in a quest to plug its deficit, having so far raised 73 trillion rupiah from bond sales both domestically and overseas.
Its sukuk issuance will adopt an ijarah structure, or a real estate sale and leaseback format between Indonesia and a special purpose company created by the government for the purpose of issuing these bonds.
The underlying assets backing the issuance will include government property in Jakarta and West Java.
Indonesia’s economy has been hit by the global downturn, though not as badly as other Asian countries given that domestic consumption accounts for two-thirds of GDP.
Credit ratings agencies have also described Indonesia’s external and fiscal position as manageable.
Still the drop in commodity exports has hit Indonesia, with the Asian Development Bank (ADB) estimating growth this year will slow to 3.6 percent this year down from 6.1 percent in 2008.
The authorities in Jakarta have taken several steps to protect the economy, including a 73.3 trillion rupiah ($6.35 billion) fiscal stimulus package, to create jobs in crucial election year.
Indonesia is in the process of tallying results from its parliamentary elections last week and faces presidential elections in July.
Indonesia has mandated Barclays Capital, HSBC HSBA.L 0005.HK and Standard Chartered STAN.L for the issuance.
The sukuk was rated ‘BB-minus’ by Standard & Poor’s and ‘Ba3’ by Moody’s Investors Service, or three notches below investment-grade. Fitch has rated the debt at ‘BB’. All three ratings are in line with Indonesia’s sovereign ratings.
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