INTERVIEW-Indonesia eyes bigger sukuk issue-fin ministry

* Eyes bigger sukuk issuance than previously planned for 2009

* May revise planned 5 trillion rupiah sukuk issue

* Conventional bonds used as reference in pricing sukuk

NUSA DUA, Indonesia, June 14 - Indonesia is considering bigger sukuk sales this year as the world's largest Muslim nation seeks to develop its fledging Islamic markets and plug its budget deficit, a senior finance ministry official said.

Dahlan Siamat, the ministry's director in charge of Islamic finance, declined to give figures, but said the bigger than previously expected issue of the Islamic bonds followed recent upward revision in overall government debt targets for 2009.

Developing Islamic markets is a key part of Indonesia's efforts to deepen its debt market in a bid to reduce the risk of economic instability arising from large maturing government debt in coming years and over-dependence on short-term bank loans for financing of long-term infrastructure projects.

When asked whether the finance ministry's bigger overall debt sales target this year meant the amount of sukuk for sale this year by the government would also increase, Siamat said :"Yes. Automatically."

He made the remarks during an interview with Reuters late on Saturday on the sidelines of an economic seminar in Bali.

The government said in May it had raised its total debt sales target this year by 44.5 trillion rupiah ($4.42 billion) to 142.3 trillion rupiah as lower interest rates fan demand for bonds. It has so far raised about two thirds of its new full-year gross issuance target.

Siamat said the government has so far this year issued around 14 trillion rupiah sukuk, including a strong debut sale of $650 million worth of global sukuk in April, testing a market badly hurt by the global financial crisis.

Siamat said the ministry may revise the size of its planed 5 trillion rupiah sukuk slated to be sold later this year but declined to give details.

"The size will be in line with our overall debt issuance plan and the 5 trillion rupiah figure may be revised. It depends on the value of the underlying assets," Siamat said.

Unlike conventional debt sukuk pays returns derived from underlying assets, often in the form of assets such as real estate, given that Islamic law bans the payment of interest.

SUKUK PRICING

He said the government views its sukuk sales more as a policy move to push the growth of Islamic markets rather than seeking lower cost of borrowing.

"The pricing, the formula, the method is exactly the same as pricing of conventional debt," Siamat said, adding the government uses conventional bonds as the benchmark in pricing its sukuk.

The aim of issuing sukuk is to "first develop sharia financial markets, second we want to diversify our sources of financing," he said. The government also plans to use its debt proceeds to finance the budget deficit, forecast at 2.5 percent of GDP in 2009.

Siamat said he expected parliament to speed up deliberations to amend double-taxation laws that make Islamic financial transactions costlier than conventional deals. The tax hit holds back the expansion in Indonesia of the $1 trillion global Islamic financial industry, bankers and lawyers say.

The amount of sukuk is very small in Southeast Asia's biggest economy. Outstanding government sukuk stood at some 18 trillion rupiah against around 700 trillion rupiah for conventional government bonds. Outstanding corporate sukuk is even lower, Siamat said without elaborating. ($1=10,060 rupiah)