Indonesia Expresses Faith in Shariah Bonds Despite Dubai World Debt Crisis

The Jakarta Globe, Muhamad Al Azhari & Aditya Wikrama

The Finance Ministry is confident the Dubai debt crisis will not damage investor confidence in government Islamic bonds. PT Indosat, however, has downsized its upcoming sukuk issue by more than half. (Antara Photo)

The Finance Ministry said on Tuesday that it remained upbeat about investor appetite for sukuk , or Shariah bonds, and had not changed its plans to issue more next year, but acknowledged that the Dubai crisis could affect the market.

“[Dubai World subsidiary] Nakheel’s problems will add to the list of corporate Islamic bonds that have defaulted” in the past year, said Rahmat Waluyanto, the ministry’s director general for debt management. However, while some corporate issuers of sukuk had defaulted globally, the Indonesian government Islamic debt was unlikely to be affected, he said.

“While the Dubai World crisis could have some impact on capital inflows into emerging markets, the government is still upbeat that investor confidence in the country’s sukuk remains high” in the longer term, he said. “This is because Indonesia’s prospects and our long-term economic fundamentals remain good”.

Nakheel, Dubai World’s real estate business, reportedly has $3.5 billion of Islamic debt paper maturing on Dec. 14, and other liabilities worth $980 million maturing on May 13, 2010.

This debt is unlikely to be repaid on time, after parent company Dubai World said on Thursday that it would ask creditors to defer payments on total debt of $59 billion for six months as a first step to restructuring, sending warning signals to the Islamic bond market.

PT Indosat, the nation’s second-largest telecommunication company, announced on Tuesday that it planned to downsize its sukuk issue this month to Rp 200 billion ($21.2 million) from the initially planned Rp 500 billion. “We’re trying to accommodate the demand for Shariah bonds,” said Adita Irawati, a spokeswoman at Indosat, implying that the demand for its sukuk would be lower than expected.

Although analysts are now saying Dubai’s debt crisis is a test for Islamic finance, Rahmat said there would be no change in the government’s plans for sukuk issues next year.

“There will still be regular auctions for the sale of conventional as well as retail sukuk. There will also be global sukuk issuances, as the government still has a strong commitment to develop the market,” he said.

The crisis could even be a boon for investors, who could switch from Dubai sukuk to the local bonds, he said. “Let’s wait and see what happens in the next one to two months,” Rahmat said.

The government has issued a variety of Islamic debt in the past two years, to both large institutional investors and retail buyers, including $650 million worth of dollar-denominated Islamic bonds it sold in February. It now plans to introduce project-backed Islamic bonds by the end of the year in an effort to diversify its budget financing sources.

Proceeds from the bonds would finance government projects, mainly in infrastructure, and those same projects would serve as the bonds’ underlying value, Rahmat said in July.

In 2010, the government plans to raise Rp 104 trillion from issuing a wide array of government bonds, including sukuk, on the domestic and local market. However, it has not issued figures on what proportion of the debt will be in Islamic bonds.

Mahmoud Abushamma, the head of HSBC Amanah Indonesia, the bank’s local Shariah unit, said he did not believe investors would treat all Islamic bonds the same after Dubai’s problems. Indonesian debt would not be compared with the emirate’s, he said.

“Indonesia is a much bigger country, with a much bigger economy and population. Indonesia has real manufacturing [industry], a lot more diversity in its economy. From that point of view, the effect [on sukuk] will not be negative,” Mahmoud said.

Wawan Hendrayana, a bond analyst at PT Infovesta Utama, said that he believed the local demand for Shariah finance products would stay high next year as the concept was still relatively new and popular. Options for Shariah-based investment are still limited in Indonesia, which was keeping demand high for local products, he said.