Indonesia Islamic-Bond Sale Falls Short

Wall Street Journal ,The Indonesian government sold 4.7 trillion rupiah ($514.2 million) of its debut rupiah-denominated Islamic bond, or sukuk, falling slightly below its target.

The government is likely to increase the size of its global dollar-denominated sukuk later this year to make up for the shortfall, people close to the deal said Friday.

The outcome of Indonesia's first government sukuk auction calls into question Indonesian investors' appetite for such securities as they have become popular in neighboring Malaysia and in the Persian Gulf region.

The Indonesian government didn't disclose results of the sale, but bankers close to the deal said seven-year sukuk were sold at yields of 11.8% and 10-year sukuk at 11.95%. Conventional seven-year government bonds yielded 11.93% Friday, while 10-year government bonds yielded 12.02%.

The government had planned to issue at least five trillion rupiah of the notes, assuming they would be snapped up by Indonesian investors. Analysts and market participants had said local investors would welcome Islamic notes as demand for government debt is on the rebound. But concerns remain that the large budget deficit could lead to oversupply in conventional bonds.

The government of the world's most populous Muslim-majority nation is tapping the Islamic debt market in order to fund its budget deficit -- officially forecast at 1.8% or higher this year -- and to give a shot in the arm to the moribund domestic Shariah finance sector.

Islamic bond issuance has soared in recent years in Malaysia and the Middle East. Even non-Muslim majority nations, such as the U.K., are also considering sukuk.

Companies in Indonesia, though, have been slow to follow suit, in large part because there has been no government sukuk issuance to provide a pricing yardstick.

Sukuk conform to Islamic Shariah law, under which interest is deemed usury and forbidden.