Indonesia sold $650 million of Islamic bonds on 23 April, six months later than planned, and only went ahead with the sale after issuing $3 billion of conventional debt in February.
The delay highlighted the correlation between the conventional and Islamic finance markets, and highlighted the need for caution to other Asian borrowers who have been looking to the Islamic market as a more resilient source of funding.
Rahmat Waluyanto, head of the debt management office in Indonesias finance ministry, told Emerging Markets in an interview in Bali that the countrys international debut was a monumental achievement, significant in attracting Middle Eastern investors to Indonesia.
Indonesia is likely to offer rupiah-denominated Islamic notes to domestic investors in the second half of the year, he added.
But Indonesias experiences in selling global Islamic bonds, or sukuk, also provide a warning to other Asian countries that are looking to tap Middle Eastern investors for much-needed capital, Waluyanto said.
Since we first decided to issue last year, the market did not develop as we had expected. The Islamic market was also very badly impacted [by the crisis] so we had to postpone.
Indonesia faces competition from other Asian governments in attracting investment from the oil-rich Middle East via Islamic bonds. And even in the Middle East itself, companies have struggled to attract demand for Islamic bonds.
Data firm Dealogic recorded just $6.5 billion of Islamic bonds sold by Middle Eastern borrowers in 2008, down more than 50% on the previous year. That drop was most pronounced in the dollar market, where volumes plummeted from $7.6 billion in 2007 to just $350 million from one deal in 2008.
The Asian governments hoping to tap the market include Hong Kong. Its chief executive Donald Tsang told investors at the end of March the government would announce modifications to our tax laws to better accommodate shariah-compliant products, in particular sukuk in this financial year.
Singapore sold its first Islamic bonds in a private placement in January, while bankers are also working on debut sukuk deals in Thailand, where the Islamic Bank of Thailand is looking to sell bonds in Malaysia, the worlds biggest market for Islamic debt. GS Caltex, the Korean oil company, is also hoping to sell Islamic bonds in the Malaysian currency. Waluyanto said Indonesia would soon introduce project-based sukuk, allowing it to meet demand for more of the debt.
Indonesias Islamic banking system is growing at 50% a year, according to Muliaman Hadad, deputy governor of Bank Indonesia, the central bank. It is a challenge for the government and Bank Indonesia as regulators to try to catch up as soon as possible with the market development.