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Shvoong Home>Society & News>News Items>Indonesia Advances Islam Bond Summary

Indonesia Advances Islam Bond

Article Summary   by:hadisetyono     Original Author: Hadi Setyono
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Indonesia aims to raise as much as $650 million through its first-ever offering of global Islamic bonds as early as this week, reviving a plan to tap the international Islamic debt market as sentiment improves.

Indonesia, Southeast Asia's largest economy, was forced to postpone its maiden global offering of Islamic bonds, known as sukuk, in November when the credit crisis triggered risk aversion. Sentiment has improved since then on expectations that the impact of the credit crunch will ease this year following government efforts to stimulate demand and support banks.

The offering comes as Asia's international debt market is struggling to emerge from a deep freeze. Indonesia is among a handful of sovereign, state-backed or highly rated Asian issuers that have managed to raise funds in the offshore bond market this year. It raised $3 billion in five- and 10-year conventional global bonds in February.

The sukuk will carry an ijarah, or leasing arrangement, whereby they generate returns based on securitized assets owned by the issuer. Sukuk and other Islamic products are structured to comply with the Quran, so they avoid interest payments and other speculative features.

Finance Minister Sri Mulyani Indrawati said the Indonesian government began soliciting orders for its sukuk Wednesday but declined to comment on when the deal might price. Another person at the Finance Ministry said the government may price its bond Wednesday if it receives sufficient orders.

So far, the sukuk has attracted more than $1 billion in orders, two fund managers briefed on the sale said.

For its first sukuk, Indonesia's government has informally suggested to investors a yield of mid-9% for the five-year bonds, though it hasn't announced official price guidance, according to one of the people familiar with the deal. That is higher than a yield of around 8.5% on Indonesia's existing five-year global bond in the secondary market.

The offering would be this year's first U.S. dollar-denominated sukuk, according to data provider Dealogic. Bankers say it could shape up as an important test of demand for Islamic debt, given signs that investors in the Middle East may have less capital to put to work following last year's plunge in oil prices.

Sukuk issuance in various currencies shrank to $14.19 billion in 2008 from $27.17 billion in 2007, Dealogic said. Demand began drying up toward the second half of the year.

The global sukuk forms part of Indonesia's plan to issue 99.6 trillion rupiah ($9.12 billion) of debt this year to fund a budget deficit forecast to hit 2.5% of gross domestic product.

If the deal goes well and prompts Jakarta to tap that market regularly, it could put Indonesia -- the world's most populous Muslim nation -- ahead of other countries such as Malaysia, Bahrain and Dubai that have been faster to develop domestic Shariah-compliant financial markets but haven't been active sovereign issuers on the international debt markets.
Published: April 16, 2009   
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