Photographer: Dimas Ardian/Bloomberg

Indonesia Turns to Islamic Savings Bonds to Plug Revenue Shortfall

  • Government planning sukuk targeted at individuals this month
  • ‘Savings sukuk is really something quite innovative:’ Union

Indonesia plans to sell its first Islamic savings bonds this month, as the government innovates to plug a $16.7 billion revenue shortfall caused by the global commodity slump.

The Finance Ministry will issue two-year Shariah-compliant debt from Aug. 22 to Sept. 2, targeted at individual investors who are now placing excess cash in bank deposits, said Suminto, Islamic financing director at the budget financing and risk management office. The notes will be available at a minimum investment of 2 million rupiah ($153) and the sale will raise about 3.9 trillion rupiah, said Suminto, who goes by one name.

A commodity rout has left Indonesia with a 219 trillion rupiah gap in annual income, forcing President Joko Widodo’s administration to find new ways to cover a fifth straight year of budget shortfalls. The sukuk sale represents an attempt by the government to tap the nation’s growing pool of $14 billion in Islamic deposits, said Abas A. Jalil, chief executive officer of consultancy Amanah Capital Group Ltd. in Kuala Lumpur.

“Introducing savings sukuk is really something quite innovative,” said Sergey Dergachev, who helps oversee $13 billion in emerging-market debt as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt. “It is a positive signal to me as an investor that Indonesia as a country is looking for alternative ways how to attract new investors, find new innovative products to finance its budget and diversify its funding base.”

The sukuk,  which aren’t tradable, will be structured according to the Wakalah or agency principle, Suminto said. The yield will be fixed on Aug. 19 and investors will be allowed to redeem up to half of the sum invested after one year, he said.

While Indonesia is a frequent issuer of Shariah-compliant debt, the bulk of the offerings are taken up by institutional investors and global funds. Its last issuance of $2.5 billion of five- and 10-year global sukuk in March received orders for 3.1 times the amount offered.

Worldwide sales of sukuk climbed 17.4 percent to $27 billion in 2016, according to data compiled by Bloomberg. Offerings totaled $35.6 billion for the whole of last year.

Diversifying Base

“Our main goal is to diversify our investor base and reach people who wouldn’t otherwise invest in government securities,” Suminto said. “People who buy savings sukuk may put their money in deposits and want somewhere safe to place them in the long term.”

Indonesia’s Islamic banking deposits recorded average yearly growth of 26 percent since 2012 to reach 174.9 trillion rupiah in May, according to official data. Banking assets which comply with the Koran’s tenets rose an average of 22 percent in the past five years to 211.4 trillion rupiah, 3.4 percent of the total.

A prolonged bout of weakness in Indonesia’s key exports of crude palm oil and rubber are weighing on fiscal revenue. Last week, the government increased the 2016 deficit target to 2.5 percent of gross domestic product from 2.35 percent and said it’d need to raise an additional 17 trillion rupiah to cover the shortfall.

“The government’s challenge is always how to reach new investors so that it doesn’t overwhelm their existing investors with too much issuance,” said Ikhwani Fauzana, head of rates trading at PT Bank Negara Indonesia in Jakarta. “This savings sukuk will be a good addition.”

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