JAKARTA, Jan 22 (Reuters) - Indonesia, Southeast Asia's
largest economy, plans to raise $1 billion through a global
Islamic bond in the second half of 2013 to help plug its budget
gap, a top official told Reuters.
This would bring the contribution to its annual budget from
domestic and global Islamic bonds to as much as 57 trillion
rupiah ($5.9 billion), the same amount as 2012.
The country, whose economy grew faster than its regional
peers at 6.3 percent last year, will also seek funds to
kick-start $54.4 billion worth of infrastructure projects this
year.
"We are in a very good economic condition and we have the
political stability to attract investors," Dahlan Siamat,
director of Islamic financing policy at Indonesia's finance
ministry, told Reuters in a telephone interview this week.
The size and maturity of the Islamic bond will be determined
after a roadshow planned for March for the two global
conventional bonds it has scheduled for 2013.
Sukuk pay returns on money invested, instead of interest,
and are a major funding tool for banks and corporates in the
Middle East and southeast Asia. Global demand for sukuk is
expected to reach $421 billion by 2016 from $240 billion in
2012, according to a Thomson Reuters survey last year.
Indonesia has come to rely on conventional and Islamic
bonds, or sukuk, to plug the deficit created largely by the $18
billion to $21 billion it spends on fuel subsidies annually.
"There is no reason to stop issuing sukuk, it has become
part of our strategy. We don't want to be completely dependent
on conventional bonds, so it is important that we have this
alternative," said Siamat.
But he added, "We are taking a different approach in
developing the sector - unlike countries like Malaysia, Islamic
finance here is market driven and growing from the bottom up."
Indonesia would not issue more sukuk this year because "the
market is not quite developed yet, and of course we have had to
see things from the cost perspective," he said, estimating the
extra cost of issuing Islamic bonds at around 25 basis points
(bps), although this has come down from 50-60 bps a few years
ago.
The country has gone to the global market several times to
issue dollar-denominated Islamic bonds, the last being a $1
billion ten-year sukuk in Nov. 2012 which was priced at 3.3
percent after attracting orders of over $5 billion.
MARKET-DRIVEN ISLAMIC FINANCE
"We look to develop our local market first, so our issuance
is mostly concentrated there. The more supply of sukuk into the
market, the better, but the big problem is how illiquid the
secondary market in Indonesia is," said Siamat.
This means bonds are often held to maturity, although he
hopes turnover will improve when the government hires primary
dealers. "They will have the responsibility as market makers,
with this the market will be much more liquid," he said.
Siamat said Indonesia is also exploring the use of sukuk
Wakalah or an agency structure - a switch from the Ijarah or
lease structure it currently relies - to allow for a more
flexible use of the underlying asset.
It is also identifying projects to be funded directly
through sukuk. The funds currently raised from sukuk go to a
state fund which finances a variety of projects.
Indonesia's Islamic banking industry, which is expected to
grow five-fold to $83 billion by 2015, must be able "to compete
with conventional peers ... on the basis of service quality,
variety of products, efficiency and returns," Siamat said.
He said the industry's growth had been "fantastic" although
asset ownership by Islamic banks remained low at 4.2 percent of
the $408 billion in Indonesia's banking sector.
"This may not be as impressive as conventional banks, but
the Islamic side has seen their assets grow from less than 1
trillion rupiah ($104 million) in 2006 to 6 trillion Indonesian
rupiah ($622 million) last year."
Although nine out of ten Indonesians are Muslim, asset
ownership by Islamic banks rank among the lowest globally.
Siamat said the number of full-fledged Islamic banks has
more than tripled since the government stopped conventional
banks using Islamic windows, and that the central bank has more
"lenient" requirements on the paid-up capital for Islamic banks.
"The government could provide incentives, in the area of tax
treatment (for Islamic banks) for example, but it is not that
easy because we also have to think about other industries.
"Incentives are not always beneficial ... It is better to
let Islamic finance develop on its own, so it is much stronger
to face the coming years," he said.
($1 = 9617.5000 Indonesian rupiahs)
(Additional reporting by Rieka Rahadiana in Jakarta; Editing by
Ruth Pitchford)