Indonesia Sells $1.5 Billion of Sukuk at Top Rate Since 2009

Indonesia sold $1.5 billion of dollar-denominated Islamic bonds at the highest yield since 2009 as it seeks to bolster its foreign-exchange reserves to support the plunging rupiah.

The nation issued the notes due in 5.5 years to yield 6.125 percent, according to Dahlan Siamat, Islamic financing director at the debt management office. That was the highest rate for global Shariah-compliant securities since Indonesia paid 8.8 percent on its debut dollar sukuk in 2009. The country last offered global Islamic paper in November, selling $1 billion of 10-year securities at a record-low yield of 3.3 percent.

Bank Indonesia has burned through $19.8 billion of foreign-currency reserves this year to stem declines in the rupiah, which has weakened 14 percent against the dollar. Investors submitted $5.6 billion of bids, more than three times the amount offered, Siamat said, compared with a bid-to-cover ratio of 1.9 times at a sale of non-Islamic 10-year dollar bonds in July.

“We succeeded in tightening the yield significantly as demand from investors was extremely large,” he said in an interview in Jakarta today. “Our financing position is now very secure for this year.”

The government hired Standard Chartered Plc, Citigroup Inc. and Deutsche Bank AG to arrange the sale, Robert Pakpahan, director general at the debt management office in Jakarta, said in July. Indonesia allocated 15 percent of the notes to local investors, 25 percent to the rest of Asia, 24 percent to the U.S., 16 percent to Europe and 20 percent to Islamic and Middle Eastern funds, according to a person familiar with the matter who asked not to be named as the details are private.

Shorter Tenor

The nation follows South Korea in tapping the global debt market, after Asia’s fourth-biggest economy drew bids for five times the $1 billion of bonds it offered last week. The 10-year notes were sold at 4.02 percent, 115 basis points more than similar-maturity Treasuries, the Finance Ministry said.

Indonesia’s dollar bonds are the worst performers in 2013 among 11 Asian emerging markets tracked by HSBC Holdings Plc indexes, declining 18 percent. The nation’s new dollar sukuk was sold at a premium of 436 basis points, or 4.36 percentage points, over similar-maturity Treasuries.

“We are compromising by taking a shorter tenor with a hopefully reasonable yield,” Siamat said yesterday. “While the government wants a longer-term horizon, we have to consider market appetite, especially the preference for shorter tenors, and secondly the cost.”

Current Account

Standard & Poor’s rates the offer at BB+, the top junk level, to reflect the “weak policy environment and external pressures,” it said in an Aug. 22 statement. Moody’s Investors Service ranks the debt at the lowest investment grade along with Fitch Ratings, which cautioned last month that Indonesia’s widening current-account deficit may destabilize the economy and lead to a rating downgrade.

The shortfall in the broadest measure of trade was $9.8 billion in the second quarter, the largest in data compiled by Bloomberg going back to 1989. Foreign-exchange reserves fell 18 percent this year to $93 billion last month, central bank figures show.

“The government must have decided that supporting foreign reserves is worth paying a steep price to sell global sukuk,” Angky Hendra, Jakarta-based head of fixed income at PT Batavia Prosperindo Aset Manajemen, which oversees 13 trillion rupiah ($1.1 billion), said last month. “The concern is that if reserves keep falling, then investor confidence will worsen.”

Sales Target

The average yield on emerging-market sovereign dollar notes was 6.2 percent yesterday, near the 6.27 percent reached on Sept. 5, which was highest since October 2011, according to JPMorgan Chase & Co. index data. The rate has climbed 182 basis points this year.

The average yield on global bonds that pay returns on assets to comply with Islam’s ban on interest rose 148 basis points this year to 4.29 percent on Sept. 6, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

Southeast Asia’s largest economy raised its 2013 net debt sales target to 231.8 trillion rupiah in June, from 180.4 trillion rupiah, as it seeks to fund an estimated budget deficit of 2.38 percent of gross domestic product this year, which would be the largest in data compiled by Bloomberg going back to 2004.

To contact the reporter on this story: Yudith Ho in Jakarta at yho35@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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