121
4.4.2 GROWTH OF THE SUKUK MARKET IN INDONESIA
In 2008, the government passed the enactment of Sovereign Sukuk Law No. 19, Shariah
Banking and Government Regulation 56 Law No. 21 and Sovereign Sukuk Issuing Companies
(as amended by Government Regulation 73), which laid the foundation for Indonesia’s Islamic
finance industry. Since then, annual sukuk issuance (sovereign and corporate) has increased
significantly, from USD0.02 billion in 2006 to USD13.8 billion as at end-December 2016, with a
CAGR of approximately 90.9%.
Due to the pick-up in sovereign sukuk issuances since 2010, the size of the outstanding
Indonesian sukuk market augmented from USD0.37 billion in 2008 to USD30.8 billion in 2016
and continued expanding to USD37.6 billion as at end-June 2017 (end-June 2016: USD28.6
billion). This translates into a 31% y-o-y increase, bringing the Indonesian sukuk market to
15.3% of all outstanding debts as at end-June 2017 (end-December 2008: 0.4%). Nonetheless,
the conventional bond market still out-paced the sukuk market, with an 84.7% share as at the
same date.
Domestic Market – Public Sector Issuance
With the unveiling of Indonesia’s 10-year Islamic Finance Master Plan in August 2016, the
government lent considerable support to elevating the issuance of sovereign sukuk, to 50% of
its total debt issuance over the next decade (from 35.1% as at end-June 2017). As a result,
sovereign sukuk issuance had surged to USD13.4 billion as at end-2016, from its debut
issuance of USD0.35 billion in 2008 (refer to Chart 4.33).
In line with the government’s push to develop the domestic ICM, initiatives and incentives
have been provided to spur domestic activities. This includes the removal of withholding tax
on interest payments on its global sovereign bonds (conventional and Islamic), which is aimed
at lowering yields by 15%-20% (Indonesia Investments, 2016). Indonesia has one of the
highest bond yields among Asian nations; its 10-year government bond yield hovered around
6.7% as at end-October 2017 (refer to Chart 4.34). The reasons cited for this include the
following (Indonesia Investments, 2017):
1. Compared to its regional peers, Indonesia’s credit rating remains less competitive.
Nevertheless, following S&P’s upgrade of Indonesia’s sovereign rating to BBB- (with a
stable outlook) in May 2017, yields have been trending downwards.
2. Indonesia’s inflation rate has been creeping up since the start of the year due to
administered price adjustments (higher electricity tariffs for specific households to
contain costly energy subsidies).
3. The volatility of the Indonesian rupiah compared to other Asian currencies.