Indonesia’s global sukuk rallied for a fourth month, the longest winning streak in more than a year, on speculation a cut in government fuel subsidies will boost demand at auctions in the coming quarter.
Yields on the 8.8 percent dollar-denominated Islamic bonds due in 2014 dropped 29 basis points in September to a record low of 1.86 percent, data compiled by Bloomberg show. The premium over similar-maturity Treasuries narrowed 34 basis points to 140 basis points, the least since the Asian nation sold the notes in 2009. Indonesia is looking to offer international sukuk in the fourth quarter, Robert Pakpahan, acting director general of the debt management office, said last month.
The plan to raise fuel prices may help reduce borrowing as a proportion of gross domestic product from last year’s 24 percent, which was half the level of 2005 and the lowest among Southeast Asia’s biggest economies. The Organization for Economic Cooperation and Development forecast in a report this week that energy subsidies will climb to 24 percent of total spending next year, compared with an estimated 19 percent in 2012, because of increasing fuel usage.
“The yield has room to decline as much as 30 basis points before year-end, as investors increase exposure to Indonesia,” Akbar Syarief, a fund manager overseeing about Rp 3.3 trillion ($344 million) at MNC Asset Management, said in an interview from Jakarta yesterday. “Reduced fuel subsides would ease the budget deficit and give room for infrastructure spending, which would contribute to growth.
Fuel Price Approval
The government is seeking parliament approval to raise fuel prices in 2013, Rudi Rubiandini, the deputy energy & mineral resources minister, said in a Sept. 19 interview, adding that permission has already been granted to increase electricity costs by 15 percent next year.
Indonesia last sold global sukuk in November, with investors submitting bids for 6.5 times the $1 billion on offer. The yield on the 4 percent notes maturing in 2018 declined 47 basis points, or 0.47 percentage point, to a record low of 3.03 percent this month, according to data compiled by Bloomberg.
The nation has sold 90 percent of its Rp 159.6 trillion bond-sale target this year, with 45.5 trillion rupiah made up of Shariah-compliant notes, according to the debt management office’s website.
Southeast Asia’s biggest economy won investment-grade status from Fitch Ratings in December last year, followed by Moody’s Investors Service in January. The two companies rate the nation’s debt BBB- and Baa3, respectively, four levels below Malaysia.
The extra yield investors demand to hold Indonesia’s 2014 sukuk over Malaysia’s 3.928 percent securities due June 2015 held at an all-time low of 21 basis points yesterday, data compiled by Bloomberg show.
Central banks in Japan, the US and Europe are pumping funds into their economies, boosting the global supply of dollars. Overseas investors increased holdings of Indonesian government debt by 3.6 percent over the past year to 242.7 trillion rupiah as of Sept. 19, the highest level of 2012, finance ministry data show.
“We have seen flows into Indonesia driven by positive stimulus winds, with most cash going into dollar securities,” Teddy Satriadi, head of the fixed-income desk at Bank Negara Indonesia, said in a Sept. 24 interview from Jakarta. “Yields will decline further to reflect our improved risk.”
Worldwide sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, are nearing a record this year as yields slumped to all-time lows. Issuance increased 91 percent to $36.3 billion, shy of 2011’s high of $36.7 billion.
Average yields reached a low of 2.88 percent on Sept. 14, and have since climbed six basis points to 2.94 percent, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference between the average and the London interbank offered rate, or Libor, widened three basis points in September to 208 basis points, the highest level since Sept. 4.
Islamic notes returned 7.3 percent in 2012, the HSBC/Nasdaq index shows, while developing-market debt climbed 14.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.
Indonesia’s government projects the budget deficit will rise to 2.2 percent of GDP this year, the biggest shortfall since 2009, before dropping to 1.6 percent in 2013, Finance Minister Agus Martowardojo told reporters in Jakarta on Aug. 14.
OECD Growth Forecasts
The cost of crude oil dropped 6.3 percent this month to $90.36 a barrel in New York and is down 8.6 percent in 2012. The nation was a net exporter of the commodity until 2008, when it left the Organization of Petroleum Exporting Countries. It now imports around 25-30 percent of its fuel, according to an estimate by state-owned oil company Pertamina.
Lawmakers rejected a proposal for an immediate 33 percent increase in subsidized fuel prices in March. We are “in no rush” to increase costs now, Martowardojo said yesterday.
Indonesia needs to rethink its spending allocation to achieve its “ambitious” development objectives and eliminate the budget deficit in three years, according to the OECD report on Sept. 17. The agency raised its economic growth forecast for 2013 to 6.2 percent from a predicted 6 percent this year.
A reduction in energy subsidies may prompt Standard & Poor’s to consider joining Fitch and Moody’s in upgrading the country’s credit rating, Syarief at MNC Asset said. S&P kept its rating at one level below investment grade in April, saying the nation’s bid to attract investment is at risk from “policy slippages” such as the failure to cut fuel subsidies.
“The planned move to cut subsidies is positive as it shows that the Indonesian government is proactively managing their budget and expenses,” Chan Cheh Shin, who manages 850 million ringgit ($276 million) as head of sukuk at OSK-UOB Islamic Fund Management Bhd., said in an interview in Kuala Lumpur yesterday. “That’s positive for Indonesian global bonds.
(Jakarta Globe / 28 Sep 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com