Indonesia rejects bids in sukuk auction

Indonesia rejected all bids in its first monthly sukuk auction on Tuesday as investors sought higher yields, but analysts linked this to short-term sentiment rather than seeing it as a major setback for the Islamic market in the world's most populous Muslim nation.
The ministry had aimed to raise 1.5 trillion rupiah ($158.7 million from the auctions of 6-year and 11-year Islamic-compliant bonds, or sukuk, as it sought to develop its Islamic market and finance the 2009 budget deficit, forecast at 2.4 percent of GDP. Analysts said demand for higher yields reflected expectations of higher inflationary pressure next year from higher global commodity prices, with Indonesia's central bank also expected to start hiking rates in the first quarter.
The domestic sukuk market should still continue to grow, however, thanks to the passing of a bill by parliament earlier this year on value added tax (VAT) which removed double taxation in the Islamic industry, analysts said. "It's not a setback for Indonesia's sukuk market. It's a reflection of market sentiment rather than the instrument itself," said Lum Choong Kuan, head of fixed income research at Malaysia's second-largest lender CIMB.
"Yields have risen over the last few days and there are also expectations that after the RBA hiked rates, Indonesia would be the first in the region to do so. This would probably be in the first quarter of next year but expectations of policy rate hikes will usually get investors going."
It showed that "the government is not under pressure to raise funds," said fund manager Imam M.S., who manages Islamic products at brokerage Trimegah Securities. The government has so far raised around 90 percent of its full year deficit financing target. "I'm surprised that the government did not take any bids, considering this was the first regular sukuk auction.
But on the other hand it's good as it gives signals to the market that the government is not in dire needs to raise money," said Benny Tjandraputra, head trader at Bank NISP. "If they accept the bids with high yields, it could increase the yield of the conventional government debt papers." The lowest yield submitted for the 6-year sukuk was 9.75 percent and the highest 11.5 percent. The 11-year sukuk saw the lowest yield at 10.5 percent and the highest at 12 percent.