Govt may sell Islamic bonds abroad

Govt may sell Islamic bonds abroad

Bloomberg, Singapore

Indonesia may next year sell its first Islamic bonds to global
investors, Minister of Finance Jusuf Anwar said, to tap Middle
Eastern demand for investments that comply with the Islamic ban
on the payment of interest.

The government may also sell regular, interest-bearing bonds
to global investors in what would be the fourth such offering
since the start of last year, Jusuf said in an interview in
Jakarta on Oct. 7.

Indonesia has sold $3.5 billion of bonds to global investors
in the past two years, more than any other Southeast Asian nation
apart from the Philippines, because it is able to pay lower
interest rates on U.S. dollar borrowing than on rupiah debt.

"Domestic investors are asking for a lot higher yield, which
the government might be loathe to pay," said Clifford Lau, a
portfolio manager at Paramerica Fixed Income (Asia) Ltd. in
Singapore.

"I think the volatility of the rupiah might still be there, so
the environment may not be favorable for the government to do
local-currency bonds."

The world's most populous Muslim nation will be able to spread
the burden of its funding needs by tapping investors in the
Middle East, who are seeking investments that comply with the
Koran's ban on interest payments.

Islamic investments are structured so that investors receive a
return on their money, for example in fees, that doesn't
constitute the payment of interest.

"There's a huge amount of money there in the Middle East and
we realized we haven't tapped any single cent," Jusuf said in an
interview in Jakarta on Oct. 7.

"That's not good."

Indonesia is raising funds to help cover its budget deficit.
The government has enough money to repay international investors
because it is on track to wipe out the deficit by 2009, the
minister said.

The government plans to lower the ratio of its debt to gross
domestic product to 42 percent next year, from 100 percent a few
years ago, Finance Minister Anwar said.

Indonesia's total debt, including loans from multilateral
agencies, is $130 billion, of which about half is dollar debt,
Anwar said. The government's budget for next year will set aside
funds for the payment of $400 million of bonds that come due in
August 2006, Anwar said.

The government plans to borrow as much as Rp 30.5 trillion
($3.04 billion) from overseas, including from bond investors,
next year to help cover its budget deficit, which it estimates
will narrow to 0.7 percent of gross domestic product in 2006.

In the six Arab monarchies that surround the gulf, oil
earnings will increase 25 percent to $250 billion this year,
according to Standard Chartered Plc. Crude oil for October
delivery reached a record $70.85 a barrel on Aug. 30 on the New
York Mercantile Exchange.

To comply with Shariah, the Muslim religious law, Islamic
bonds typically are secured by assets such as real estate, and
investors are paid from rental income. At maturity, the assets
are sold to pay the principal.

The government is still studying the assets that could back
such a sale, Jusuf said. The government has agreements with
multilateral and bilateral lenders guaranteeing it won't pledge
some of its assets if that pledge will reduce the lenders'
security.