Indon government issues first islamic bond
Updated
The world's largest Muslim nation has released its first Islamic bond for individual or retail investors. Indonesia has lagged behind its neighbours in offering Islamic finance products but the government hopes demand will be strong for the new bonds. Jakarta will use the issue to raise part of the US$6billion it plans to spend on stimulating the economy.
Presenter: Karon Snowdon, finance correspondent
Speaker: Aninda Mitra, vice president, Moody's Investor Services
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SNOWDON: The Indonesian government hopes to get a US$6billion stimulus package approved by the parliament soon.
The bond market is a traditional means of raising part of the money and now investors have a choice of sharia compliant products, or sukuk.
Sharia finance in general makes up a tiny part of Indonesia's finance system and while institutions have had access before this latest government backed security is the first for retail investors.
Indonesia is a long way behind developed sharia markets in neighbouring Malaysia and Singapore.
Aninda Mitra is a vice president and senior analyst in the Sovereign Risk Group at Moody's Investor Services in Singapore. He says the size of the bond issue will depend on investor demand but the timing is good.
MITRA: One would expect that the liquidity in the sukuk markets probably slightly more friendlier, given the fact that global dollar or euro bonds have been quite volatile lately. So, I think Indonesian authorities are looking to take advantage of this trade off here with the sharia market is looking a bit more favourable.
SNOWDON: It has been flagged for sometime, but Indonesia has been slow as a Muslim country to issue Islamic bonds, so are the conditions quite favourable now to do so?
MITRA: Not being an expert on the sukuk retail market, I don't know if there is any specific attributes of this market that lends more of an opportunity or not for Indonesian authorities to do this at this current moment in time. But that being said, given the overall global situation, I think it is useful on the part of the authorities to explore all possible options and raise financing wherever possible.
SNOWDON: Government revenues are shrinking as Indonesia's economic growth looks like falling to around 4.5 per cent this year down from about 6 last year.
Moody's hasn't rated this bond issue but Aninda Mitra says Indonesia's outlook is stable.
MITRA: Indonesia's sovereign credit risk rating is currently BA3, which is a stable outlook, which is about three notches lower than investment grade and the outlook is still stable. There have been quite favourable credit improvements, but there are also some structural risks, given that a large proportion of Indonesia's debt is in foreign currency and there are some foreign exchange risks and reserve adequacy has come under sharper focus, given the fact that liquidity is so tight in global markets today.
SNOWDON: Indonesia isn't the only government raising money.
In all Asian governments have pledged around US$700billion for pump priming, putting pressure on already jittery capital markets.
According to a just released report by the Asian Development Bank, the general bond market is set to expand this year as governments around the region raise the funds for their stimulus packages. In contrast, local bond sales across the region slumped by 60 per cent slump in the last quarter of 2008.
But the bank believes the competition will mean private companies might have trouble accessing finance - a big problem for them in the last six months.
Aninda Mitra says many wont be looking for credit right now.
MITRA: Private sector credit remains very weak and a lot of the money is actually going into government bond markets.
SNOWDON: Which means life will get harder for corporates trying to raise funds?
MITRA: But I mean if you are also working through an economic slowdown, the inventories have piled up and you are cutting production, presumably you will not need a lot of fresh new financing.
