Indonesia plans to sell up to 7.5 trillion rupiah ($650 million) of Islamic bonds before June, its first global sukuk issue, but analysts said market conditions are expected to remain tough due to the global crisis.
Rahmat Waluyanto, treasury director general at the finance ministry, said the global sukuk would be issued before a Samurai bond issue which is planned for June, and the size would depend on the underlying assets available. "We will adjust it based on the underlying asset, and the underlying assets that we have are (worth) around 7.5 trillion rupiah," he told reporters. The government of the worlds most populous Muslim nation has already raised more than two-thirds of its gross debt issuance target for 2009, but it wants to tap a wider investor base using a broad array of instruments including sharia-compliant debt.
Separately, Dahlan Siamat, an official in charge of Islamic debt at the ministry, said the underlying assets consist of government property in the capital Jakarta which are worth 7.24 trillion rupiah and in Bandung, the capital of West Java province, which are worth 250 billion rupiah.
The sukuk will be issued according to the ijara contract. Ijara is a lease where a bank buys an asset and rents it to its client for a fee that includes the purchase price and the profit rate to be earned by the bank during the rental period.
Sukuk ijara were the most popular form of Islamic bond last year, according to rating agency Moodys. Bankers expect ijara to remain one of the most dominant Islamic bond structures this year, as investors opt for the certainty of lease payments over riskier profit-sharing contracts. "Market conditions are still tough," said Ngiam Ai Ling, Fitchs director of Asia sovereign ratings. referring to Indonesias planned issuance. "I would think that pricing might still be slightly tough in this kind of climate."
Islamic law bans interest payments so bond holders are instead paid income derived from assets, for example rent from property, or from commercial transaction such as trade in goods and services.
Despite its earlier billing as a safe haven, the $1 trillion Islamic financial industry has been hit by the sharp global downturn as plummeting property prices in key centres such as Dubai hurt sharia banks. Globally, the value of Islamic bonds issued in 2008 fell more than 56 percent to $14.9 billion from 2007, according to Standard & Poors.
The Asian arm of Kuwait Finance House, Kuwaits top sharia lender, said this month Islamic bond sales are likely to drop this year from 2008 although local currency issuances will help support markets.
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