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.