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Sukuk yield gap surges, short-term outlook for Indonesia's debt is challenging

Friday, 2 August 2013

JAKARTA: The yield premium investors demand to hold Indonesia’s sukuk over Malaysia’s surged to a two-year high this week after interest rates were raised to stem quickening inflation and support the plunging rupiah.

The difference between Indonesia’s 11.95% local–currency Islamic bonds due August 2018 and Malaysia’s five-year benchmark ringgit notes reached 4.59 percentage points on July 29, the widest since April 2011, data compiled by Bloomberg show.

The yield on the Indonesian debt rose 118 basis points to 7.94% last month, while that on the Malaysian securities was little changed at 3.58%.

Bank Indonesia increased its reference rate by 75 basis points to 6.5% over the last two meetings to slow inflation that surged to a four-year high in July. Deputy governor Perry Warjiyo said this week the country would post a current-account deficit of US$8bil in the second quarter, matching the record shortfall in the same period last year.

The rupiah fell in July by the most since February 2009.

“The short-term outlook for Indonesia’s debt is challenging,” said Marsangap Tamba, Jakarta-based head of investment at PT Sun Life Financial Indonesia, which manages 7.5 trillion rupiah (US$729mil).

“The fundamentals are weaker in terms of the rupiah, the current-account deficit and inflation, so investors are shying away from Indonesia specifically, even during this broader exit from emerging markets.”

The government cut fuel subsidies for the first time since 2008 last month to keep its fiscal deficit below the legal limit of 3% , spurring inflation. Consumer prices rose 8.61% last month from a year earlier, compared with 5.9% in June and the 8.04% median estimate in a Bloomberg survey, the statistics bureau said yesterday.

That’s almost five times Malaysia’s June inflation rate of 1.8%, which will probably remain below 2% for the rest of the year, Tim Condon, head of Asia research at ING Groep NV in Singapore, wrote in a research note last week.

Bank Negara has held its benchmark interest rate at 3% since May 2011.

“I don’t see any change in Malaysia’s overnight policy rate this year as inflation is under control,” Nik Mukharriz Muhammad, a fixed-income analyst at CIMB Investment Bank Bhd. in Kuala Lumpur, said in a July 30 interview.

The rupiah fell 3.4% to 10,278 per dollar in July as Bank Indonesia allowed it to slide toward levels quoted in the offshore market. That compared with a 2.6% drop in the ringgit to 3.244.

South-East Asia’s largest economy recorded its sixth straight quarterly current-account deficit in the first three months of this year, the longest run since 1997.

The US$8bil shortfall in the second quarter of 2012 was the largest in data compiled by Bloomberg going back to 1989.

The average yield on global sukuk fell 25 basis points last month to 3.78% on Wednesday, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, paring its increase this year to 97 basis points.

The spread over the London interbank offered rate, or Libor, narrowed 31 basis points in July to 186.

Worldwide sales of bonds that comply with Islam’s ban on interest have declined 28% this year to US$20.5bil from the same period in 2012, data compiled by Bloomberg show.

Issuance totaled a record US$46.4bil in 2012.

Global Islamic securities lost 0.9% in 2013, according to the HSBC/Nasdaq index, compared with a 7.4% drop for emerging-market debt, according to JPMorgan Chase & Co’s EMBI Global Index. – Bloomberg

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