After years of planning, the Ministry of Finance on Wednesday held meetings with institutional investors in the East Javanese capital of Surabaya and the resort city of Bandung and will kick off the main public roadshow Thursday in Jakarta.

The rupiah-denominated bond, set to price on August 26, is likely to be for around $1bn and will be followed by a similarly sized US dollar-denominated offering by mid November.

Sanctioned only in April, the government sukuk will provide another vital funding source for the government’s burgeoning budget deficit and should spur other borrowers to tap the local Islamic market more aggressively.

Islamic bonds, or sukuk, are structured to comply with Muslim law and so, for example, avoid interest payments which are deemed to be usury. Instead, they make coupon-style payouts derived from profits or tangible underlying assets.

The government’s upcoming deals will use the ijarah, or lease, structure backed by 18.37tn rupiahs (US$2bn) worth of land and buildings that the government has set aside.

Islamic bond issuance has soared in recent years in neighbouring Malaysia and the Gulf, while governments in non-majority Muslim nations like the UK are also mulling sukuk.

But companies in Indonesia - home to over 220mn, most Muslim, people - have been slow to follow suit in large part because there has been no government sukuk issuance to provide a pricing yardstick. That, in turn, has stymied the development of Islamic banking, Islamic funds and other Shariah-compliant products.

“If there is a better benchmark more companies will issue sukuk and then in effect there will be more supply in the market and, hopefully, the market will be more liquid,” said Erisa Habsjah, a debt analyst with PT Danareksa Securities in Jakarta.

A successful deal could even prompt the government to tap the sukuk market regularly in the same way as Malaysia and some Middle Eastern nations.

As of July 31, there were 4.18tn rupiah in outstanding rupiah-denominated sukuk from companies like cellular provider PT Indosat, energy firm PT Aneka Gas and Bank Muamalat, comprising only about 5% of the overall corporate bond market.

Moreover, most are small in size, typically making up 15%-20% of a fund-raising comprising largely conventional debt.

Sukuk in Malaysia, by contrast, made up nearly 40% of all bonds issued in Malaysia last year and account for a third of all bonds outstanding.

Final details of the Indonesian government sukuk are likely to emerge as the government gets feedback from potential investors during its marketing.

The deal size needs to be chunky if it is to provide a liquid pricing benchmark and put a dent in the country’s budget deficit which is officially forecast at 1.8% of gross domestic product this year, a figure some analysts say is optimistic.

A person familiar with the deal has said the government will issue paper with seven-and 10-year tenors that are in short supply on the conventional market.

Source: http://www.gulf-times.com