Dollar sukuk issued by Indonesia are outperforming those of Malaysia, boding well for the government’s plan to tap the global market for a fifth year.

Indonesia’s existing notes maturing in 2018 through to 2024, which are rated the lowest investment grade by Moody’s Investors Service, returned 3.1 percent to 5.5 percent this year, data compiled by Bloomberg show. Three of Malaysia’s higher-rated sukuk due from 2015 to 2021 gained 0.3 percent to 1.8 percent.

Investors are banking on Standard & Poor’s joining Moody’s and Fitch Ratings in upgrading Indonesia from junk amid President Joko Widodo’s fiscal reforms, according to RHB Research Institute. Malaysia lowered borrowing costs in its sale of $1.5 billion of Islamic bonds last week, attracting $9 billion in bids even as the nation’s finances are under pressure from falling oil prices and a warning from Fitch of a possible downgrade.

“The Indonesian government could take advantage of the still favorable market conditions to price the sukuk in their favor,” Fakrizzaki Ghazali, a credit strategist at RHB Research in Kuala Lumpur, a unit of the nation’s fourth-largest bank, said by e-mail on Wednesday. “They may consider issuing to lengthen their maturity profile for dollars by locking in long-term rates.”

Supply shortage

Indonesia is seeking to return to the global sukuk market in the first half of this year. It last sold $1.5 billion of 10-year notes with a coupon of 4.35 percent in September. The yield has dropped 41 basis points to 3.94 percent in 2015. State-owned airline Garuda Indonesia is also planning to issue $500 million in the nation’s first corporate global sukuk.

Indonesia’s Islamic notes are also outperforming the Bloomberg USD Emerging Market Sovereign Bond Index, which has returned 3 percent in 2015. The sukuk due in 2019 are leading gains, with the yield falling 72 basis points this year to 2.63 percent. It dropped to 2.61 percent on April 13, the lowest since the 2013 issuance.

The Southeast Asian nation has benefited from a slump in crude as a net oil importer, helping the government narrow its current-account deficit. Conversely, as Asia’s only major energy exporter, Malaysia has seen its surplus in the broadest measure of trade dwindle.

Malaysia sold 10- and 30-year Islamic bonds at coupons of 3.04 percent and 4.24 percent, respectively, as it sought to refinance the $1.25 billion of sukuk due in June this year and lengthen maturities. Both were priced below the initial target spreads over US Treasuries.

Demand for Malaysia’s securities was also a reflection of the lack of supply as Shariah-compliant investors chase more sukuk in which to park their excess funds, according to Union Investment Privatfonds in Frankfurt. Ernst & Young forecasts global Islamic banking assets will rise to $3.4 trillion in 2018 from about $1.7 trillion in 2013.

‘Feels right’

“Malaysia is still a very well-rated credit and there’s a very small level of supply of high-grade sukuk,” Sergey Dergachev, who helps oversee $13 billion of emerging-market debt as a senior money manager at Union Investment, said by e-mail on Tuesday. “Islamic funds and Islamic banks are flush with liquidity, and they need to invest in new instruments.”

President Widodo plans to spend the equivalent of $425 billion over the next five years to build dams, railways and airports as he aims for 7 percent economic growth by the end of his term in 2019. The central bank forecasts growth of 5.4 percent to 5.8 percent this year, faster than last year’s 5.03 percent that was the slowest since 2009.

“I fully expect Indonesia to issue dollar sukuk in the second quarter,” Ezra Nazula, who manages $2 billion as Jakarta-based head of fixed income at Manulife Aset Manajemen Indonesia, said by e-mail on Wednesday. “The timing for new issuance feels right given the low US Treasury yields and continued global demand for high-yielding emerging-market assets.”

Bloomberg

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Source: The Jakarta Globe