Prospects Indonesia will get a credit-rating upgrade from Moody’s Investors Services are pulling down yields on government Islamic notes from a two-month high and improving the outlook for a second global sukuk.
The yield on the Southeast Asian nation’s five-year sukuk has dropped to 2.85 percent from 3.14 percent on Nov. 16, according to prices from the Royal Bank of Scotland Group, as Moody’s said this week it may raise Indonesia’s Ba2 rating on growth and improving debt levels. The government sold the notes in April last year at a yield of 8.8 percent.
Moody’s cited “economic resilience” in putting the country’s rating, which is two levels below investment grade, on review on Dec. 1 for a possible upgrade. The government, which attracted more than seven times the amount offered for its inaugural overseas sukuk, postponed an offering of Islamic bonds originally planned for July until the first half of 2011.
“A rating increase of two steps would certainly open up the investor pool because most fund managers follow strict guidelines that don’t allow them to invest in assets that are non-investment grade,” Zeid Ayer, who helps manage $1.6 billion of Shariah-compliant assets at CIMB-Principal Islamic Asset Management Bhd., said in an interview in Kuala Lumpur yesterday.
The extra yield investors demand to hold Indonesia’s Islamic notes over similar-maturity U.S. Treasuries has narrowed to 182 basis points, or 1.81 percentage points, from 705 when the bond was sold in April 2009, according to data compiled by Bloomberg.
Sukuk Rally Snapped
Sukuk snapped a five-month rally in November as Ireland sought a bailout for its banks from the European Union, reducing demand for higher-yielding assets. Average yields climbed 24 basis points since the end of October to stand at 5.09 percent yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Malaysia, the world’s biggest market for sukuk, raised $1.25 billion in June from a sale of Islamic bonds, the nation’s first global debt offering in eight years. It received orders for five times the amount on offer, according to the finance ministry.
The yield on Malaysia’s 3.928 percent dollar-denominated sukuk due in June 2015 rose seven basis points this week to 2.97 percent, according to RBS prices. The rate has dropped 96 basis points since the date of issue, while the spread with similar- maturity Treasuries shrank to 151 points from 180. Malaysia is rated A3 by Moody’s, the fourth-lowest investment grade.
Rahmat Waluyanto, director-general at the Indonesian Finance Ministry’s debt-management office, said Aug. 26 the government delayed its second sukuk sale after raising “adequate” funds domestically and because of Greece’s debt crisis.
“A rating increase means we could sell at a lower yield and we do need funds to finance our budget and perhaps our dollar debt,” Waluyanto said yesterday. The exact size and timing of the new offering will depend on market conditions, he said. Indonesia sold $650 million at the last sale in 2009.
Indonesia’s credit-rating outlook was raised to positive from “stable” by Moody’s in June. Standard & Poor’s upgraded its assessment to BB in March, two levels below investment grade, and Fitch Ratings in January lifted its grading to BB+ from BB.
“As long as the rating is below investment grade, issuers will not see any changes to their borrowing costs,” Chan Cheh Shin, chief investment officer at Kuala Lumpur-based HwangDBS- AIIMAN Asset Management Bhd., said in an interview yesterday. “Ultimately, you’re still attracting the same group of people, those seeking high yields.”
Global sales of sukuk, which pay returns based on asset flows to comply with the religion’s ban on interest, fell 31 percent this year to $13.8 billion, Bloomberg data show. Issuance reached a record $31 billion in 2007.
Shariah-compliant bonds returned 11 percent this year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 13.4 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
The difference between the average yield for emerging- market sukuk and the London interbank offered rate widened eight basis points this week to 349, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed five basis points to 379, data compiled by Bloomberg show.
Indonesia’s government and local companies have issued $5.1 billion of Islamic and non-Islamic bonds internationally this year, 30 percent less than the same period of 2009, according to data compiled by Bloomberg. The Finance Ministry sold 60 billion yen ($713 million) of 10-year Samurai debt on Nov. 12 through a private placement, according to a government statement.
The country had a total of $186 billion of debt outstanding as of Oct. 31, compared with $169 billion at the end of last year, according to the Finance Ministry. Overseas borrowing stood at $67.8 billion, up from $65 billion at the end of 2009.
The budget deficit may widen to 2.1 percent of gross domestic product this year from a shortfall of 1.6 percent in 2009, the ministry forecasts. Malaysia, Southeast Asia’s third- largest economy, had a deficit of 7 percent of GDP last year.
The economy may expand as much as 6.5 percent in 2011 and an estimated 6 percent to 6.3 percent this year, the central bank said Oct. 5.
Indonesia may reach investment grade within two years, which would place it on a par with India and Hungary, Anton Gunawan, the chief economist at Jakarta-based PT Bank Danamon Indonesia, said in an interview yesterday.
“The sooner the government sells the debt the better,” he said. “Yields are still low.”
To contact the editor responsible for this story: Sandy Hendry at email@example.com.