Indonesian sukuk law to attract Mid East investors

Financial Times.com, By John Aglionby in Jakarta, Tuesday Apr 8 2008 15:25

Indonesia's parliament is set to pass a bill on Islamic debt financing on Thursday that will open up a new and potentially lucrative funding source for both the government and companies in the world's most populous Muslim nation.

Analysts see the law as a rare piece of good news for Indonesia, which is battling a ballooning budget deficit and soaring inflation, as it will make the country more attractive to Middle Eastern investors, many of whom only use Islamic products.

Rakesh Bhatia, the head of HSBC in Indonesia, said the legislation, which has taken two years to complete, was "extremely positive".

"Internationally, there is plenty of money available in this area, so the law will give the government and the country access to additional capital," he said. "We're already in advanced talks with companies that are just waiting for the government to take the lead."

Sri Mulyani Indrawati, Indonesia's finance minister, told the Financial Times the government intends to issue up to $1.6bn in sukuk, or Islamic bonds, in the second half of this year, once the law's implementing regulations have been finalised.

This would account for about 16 per cent of the predicted budget deficit, which has ballooned by 27 per cent in the wake of soaring fuel subsidies and inflation.

Sukuk will enable the government to diversify from its traditional debt instruments, on which yields have risen by more than 200 basis points in the past few weeks as markets become increasingly nervous about the budget's stability.

Sukuk do not pay interest, generating returns through actual transactions such as profit sharing or leasing.

Ms Sri Mulyani said: "We'll consider both the domestic and international environments when deciding whether the sukuk will be institutional and mainly international, or domestic retail."

She said that, assuming the present economic growth patterns, Indonesian corporate sukuk issuance could reach $11bn in a few years, or more than three times the total 2007 corporate bond issuance.

"As the economy grows and the development of our own capital market and financial markets gets more advanced, I'm optimistic that Indonesia will be able to compete [as a global sukuk player]," she said. "The timeframe to improve the hard infrastructure, such as institutions, and soft infrastructure, like regulations, will be around five years."

Malaysia is the world's leading sukuk market, issuing about half of the $51.5bn issued last year - a 90 per cent increase on the $27.2bn issued globally in 2006.

Abiprayadi Riyanto, the head of Mandiri Investasi, doubted Indonesia would be able to compete with Malaysia "in the near future". "The Malaysian government's commitment to develop sukuk is so high, while in Indonesia there are so many bureaucratic hurdles," he said.