Indonesia, the most populous Muslim country and potentially the largest market for Islamic finance, has received a major boost to press ahead with the issuance of its proposed benchmark global Islamic trust certificates (sukuk) which will be issued by Perusahaan Penerbit SBSN Indonesia II (PPSI II), a special purpose vehicle (SPV) on behalf of the Ministry of Finance of Indonesia.
The issuance, which has been assigned a “BB+” long-term foreign currency issue rating by Standard and Poor's and a provisional rating of Ba1 by Moody's Investors Service, was subject to the right market conditions, especially pricing. In fact, there was talk of a delay because of the volatility in the global markets as a result of the European sovereign debt crisis and the economic recession especially in the West where economies are struggling even to achieve a 1 percent GDP growth rate.
The boost came from neighboring Malaysia, where Khazanah Nasional Berhad, the country's sovereign wealth fund (SWF), a few days ago successfully issued a 3-year benchmark offshore Renminbi 500 million sukuk in Hong Kong, the first sukuk to be issued in the Chinese currency. The so-called Dim Sum Sukuk was supposed to have been issued in September but the Malaysian SWF delayed the offering because of difficult market conditions and because it could not get the required yields it was aiming for.
The fact that the transactions was 3.6 times oversubscribed and priced at a tight 2.9 percent, suggests that good quality Islamic papers especially from a selected Asian countries remain attractive to investors starved of quality conventional counterparts and are to a certain extent insulated from the vagaries and volatility of the international markets.
Even in the important Middle East markets, local arrangers are seeking mandates for sukuk, especially offshore offerings, outside the region, where local issuances are largely the order of the day in Saudi Arabia, the UAE and Bahrain. At the same time, GCC issuers are increasingly seeking to raise funds through sukuk issuances in the south east Asian markets, which are considered more stable and sukuk investment friendly.
Bhimantara Widyajala, director at the Debt Management Office of the Indonesian Ministry of Finance, confirmed that the country is proceeding with plans to issue a benchmark global sukuk, but only at the right time and market conditions. HSBC, Citigroup and Standard Chartered are reportedly mandated to arrange the issuance, which could be up to $1 billion, depending on market demand.
The rating rationale for the proposed sukuk, according to Standard and Poor's (S&P), is based on the fact that, under the related lease and repurchase agreement between the Government and PPSI-II, the government is obliged to make all payments to PPSI-II to ensure that the issuer has sufficient funds to make full and timely periodic distribution and principal payments to certificate holders.
"We rate this issue on par with the sovereign's commercial financial obligations. This is because, in our view, the sovereign's contractual commitment gives the government a strong incentive to treat its obligations to PPSI-II under this transaction pari passu with its other obligations, including conventional debt. We consider that governments may sometimes in stressful fiscal situations consider rent or lease obligations as subordinate to bonds or bank loans. However, in this case, we expect a default by the government on its obligations under this transaction would likely trigger a default on the certificates. We believe that the government will consider the performance of the certificates as being equally important as the performance of its conventional debt," said S&P in its rating statement.
At the same time Moody's stressed that its rating of the proposed sukuk reflects Indonesia's sovereign rating which has been supported by increasingly robust domestic demand over the past few years, and which has helped to shield the economy from the global financial crisis. "In the ensuing recovery, the pickup in commodity prices has further bolstered to the economic outlook. Overall, growth looks to be sustainable and has not been accompanied by significant overheating pressures. In addition, government finances continue to be managed conservatively with deficits averaging well below 2 percent of GDP since 2001," added Moody's.
Indonesia's continuing progress toward facilitating Islamic finance is further underlined by the launch last week of its own Commodity Murabaha trading platform at the Jakarta Futures Exchange (JFX) in the presence of Trade Minister Mari Elka Pangestu. The platform is a collaborative effort between JFX, Bank Indonesia (the central bank), the Commodity Futures Trading Supervisory Board and the National Syariah Board of the Ulema Council of Indonesia (MUI).
Indonesia is one of the world's largest suppliers of primary commodities and it is not surprising that the underlying contracts for the Commodity Murabaha platform are palm oil futures and its derivatives such as olefins and metals. The platform, if it develops according to international best practice, may eventually prove to be a rival to Bursa Malaysia's Bursa Siq Al Sila platform, Bahrain's Bursa Al Bait platform and the warrants issued on the London Metals Exchange (LME), which has traditionally been the “backbone” of Commodity Murabaha trading, primarily used for short-term liquidity management and for servicing investment and current accounts at Islamic banks.
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