INTERVIEW-Indonesia to tap global sukuk market for $1 bn in 2013

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)

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