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Indonesia plans almost US$1.37b in Islamic bonds for infrastructure projects to kickstart economy

Indonesia will double sales of project Islamic bonds next year as it seeks to kickstart a slowing economy with spending on roads, ports and power plants.

[JAKARTA] Indonesia will double sales of project Islamic bonds next year as it seeks to kickstart a slowing economy with spending on roads, ports and power plants.

Some 13.7 trillion rupiah (S$1.37 billion) of Shariah- compliant sovereign debt tied to particular ventures will be offered, up from 7.14 trillion in 2015, Finance Minister Bambang Brodjonegoro said on Aug 25.

Project sukuk fits well with the government's infrastructure focus and the funds will be used to build Islamic universities, Jakarta rail lines and roads and bridges across the archipelago, Suminto, Islamic financing director at the debt management office, said in an interview on Tuesday.

As commodity prices slump and consumer confidence evaporates, President Joko Widodo is turning to state construction projects to spur an economy growing at the slowest pace since the aftermath of the global financial crisis.

Demand for Shariah debt may be stronger than for non-Islamic notes because it usually offers a yield advantage, said Ezra Nazula, who manages more than US$2 billion as head of fixed income at PT Manulife Aset Manajemen Indonesia."Investors in project-based sukuk tend to be local investors seeking more stability than the conventional bonds," he said. Indonesian sukuk "gives us an attractive spread over conventional bonds with relatively identical risk," said the Jakarta-based Mr Nazula.

The yield on Indonesia's Shariah-compliant sovereign debt due January 2025 has been 46 basis points higher on average over the past year than that on the non-Islamic notes due September 2024, according to data compiled by Bloomberg. The yield advantage has reversed since the end of July with the sukuk yield rising three basis points to 8.66 per cent and the conventional yield increasing 29 basis points to 8.95 per cent.

Investors tend to hold Indonesia's Islamic bonds until maturity. That makes them less volatile in times of market stress such as the emerging-market selloff that saw foreign funds pull a net 7.96 trillion rupiah from the country's debt last month in the biggest outflow since December.

Southeast Asia's biggest economy is feeling the chill as slowing demand from China depresses prices for its coal, palm oil, tin and rubber exports. Indonesian shipments have fallen for 10 straight months through July.

The government has allocated 313.5 trillion rupiah for infrastructure spending in 2016 in its budget released Aug 14, an increase of 8 per cent from this year. It's struggling to spend this year's allocation, with PT Trimegah Securities saying the Public Works and Housing Ministry had only spent 24 per cent of funds earmarked for 2015 in an Aug 20 research note.

Next year's project sukuk goal represents a more than tenfold increase from sales of 800 billion rupiah of the notes in 2013 and 1.5 trillion rupiah last year.

The government sold 1.94 trillion rupiah of project sukuk on Aug 25 tied to three separate ventures with bid-to-cover ratios ranging from 1.19 times to 3.49 times."In the previous sales, especially this year, the response to project-backed sukuk was very good," said I Made Adi Saputra, a fixed-income analyst at PT BNI Securities in Jakarta. That bodes well for the offers next year, he said.