Opportunity for RI in bigger sukuk market: Moody’s

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Satria Sambijantoro, The Jakarta Post

New issuers and a larger number of investors are expected to flood the sukuk market in coming years, with Indonesia having the opportunity to boost the issuance of its sharia-compliant bonds to deepen its financial market, ratings agency Moody’s Investors Service says.

Global sukuk issuance was likely to maintain its positive long-term growth trend due to increasing demand for Islamic financial assets, with Indonesia having “the potential to become one of the key sukuk markets in the long term”, Moody’s analyst Rehan Akbar wrote in a report released on Wednesday.

“As a populous Muslim country with several sovereign issuances and a growing domestic Islamic finance market, Indonesia also has significant long-term potential,” Akbar wrote in the report, heaping praise on the government that has so far been supportive in fostering the development of the local sukuk market.

Moody’s estimated that the global sukuk market would continue its impressive 38 percent compound annual growth rate (CAGR) that it has recorded over the last decade. Total issuance of sharia-compliant notes globally has seen almost 75 percent growth, from US$30 billion in 2006 to an estimated level of $51 billion by the end of this year.

“The strong growth and high likelihood of continued sukuk issuances reflects growing investor comfort with these instruments, as well as the increasing funding needs of sovereigns, corporates and banks, particularly in Islamic countries,” Khalid Howladar, Moody’s senior credit officer, wrote in an email.

However, despite its robust potential in the long run, the sukuk market may face a “challenging” outlook in the short term as the prospect of tighter US monetary policy could deter new investors from entering the sharia-compliant bonds market, Moody’s said.

Data from the Finance Ministry’s debt management office shows that total outstanding tradable sukuk reached Rp 87.6 trillion ($7.3 billion) as of November, a relatively small figure compared to Rp 990.8 trillion of conventional bonds traded in the secondary market.

Sukuk auctions in Indonesia normally attract low demand among investors, who still deem the sharia-compliant notes as illiquid assets that are difficult to trade. The government, for example, only managed to raise Rp 500 billion from its latest sukuk auction on Nov. 26, half of its indicative target of Rp 1 trillion.

“Our market is not liquid because our sukuk market is yet to have any benchmark series that can be used [as a standard] for trading in the secondary market. We do not have ‘market makers’,” Dahlan Siamat, director of Islamic financing policy in the Finance Ministry’s debt management office, said on Wednesday.

However, he expressed his optimism that the country’s sukuk market would develop significantly due to higher demand of sharia-compliant financial assets in the long run.

For example, total incoming bids annually in sukuk auctions have increased significantly from Rp 33.7 trillion in 2011 to Rp 71.2 trillion this year, according to Dahlan.

He added that the government would also push the development of project-based sukuk that used infrastructure projects as underlying assets. Analysts have touted the project-based bonds as a solution to the underdevelopment and illiquid market of Indonesia’s sukuk, which still lacks assets that can be used as collateral. A project that has been used as collateral for project-based sukuk is the Transportation Ministry’s plan to build a double-track railway from Cirebon in West Java to Kroya in Central Java, valued at Rp 1.5 trillion.

Sukuk adhere to Islamic investing principles, where the bondholders have a share in the ownership of tangible assets that act as collateral. This is different from conventional bonds, which do not offer ownership but guarantee returns from interest paid by the issuers.

Meanwhile, Indonesia’s dollar-denominated sukuk have proved popular among foreign investors. Indonesia’s sharia-based greenback notes sold in November last year were the world’s best performer in the sukuk market last month, with returns in the secondary market topping 6.7 percent.