The Comparison of Sukuk and Bond Absorption; Deficit Budget Financing in Indonesia

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1. Tazkia Islamic Finance and Business Review Volume 10 .2 The Comparison of Sukuk and Bond Absorption; Deficit Budget Financing in Indonesia Salman Al Parisia & Aam Slamet Rusydianab a Awardee LPDP PK 103, SB IPB & Researcher of Smart Consulting, bResearcher and Executive Director of Smart Consulting Corresponding: salman.al.farisi.tazkia@gmail.com Abstract Objective - This study aims to analyze: (i) the comparison of sukuk and bond absorption in deficit budget financing; and (ii) which variable that has significant effect on deficit budget (Y1= equation 1), on bond (Y2= equation 2) and on sukuk (Y3 = equation 3). Method - This study uses Two Stage Least Square (2SLS) method. The data used is from Bank of Indonesia, Central Bureau of Statistic (BPS), Minister of Finance, IDX, Minister of Trade, with monthly data, February 2009 – December 2015. Results - The result shows that sukuk has a significant negative effect on deficit budget while bond has a significant positive effect on deficit budget. In addition, import has a significant negative effect on deficit budget while exchange rate variable has a significant positive effect on deficit budget (the first equation). BI rate has significant negative effect on bond, while SBI (Certificate of Bank of Indonesia) and deficit budget has significant positive effect on bond (the second equation). Then, Inflation and bond has significant positive effect on sukuk, while deficit budget has significant negative effect on sukuk (the third equation). Conclusion - Both sukuk and bond have significant correlation in increasing each of them. Furthermore, both sukuk and bond have significant effect on deficit budget. Keywords: Sukuk, Bond and Deficit Budget Abstrak Tujuan: Penelitian ini bertujuan untuk menganalisis: (i) perbandingan penyerapan sukuk dan obligasi dalam pembiayaan defisit anggaran negara; dan (ii) variabel apa saja yang mempengaruhi defisit anggaran (Y1), obligasi (Y2) dan sukuk (Y3). Metodologi: Penelitian ini menggunakan metode Two Stage Least Square (2SLS). Data yang digunakan adalah data sekunder dari Bank Indonesia, BPS, Kementerian Keuangan, IDX, Kementerian Perdagangan, dengan data monthly, periode Februari 2009 – Desember 2015. Hasil: Hasil analisis menunjukkan bahwa (sukuk) berpengaruh negatif sedangkan (obligasi) berpengaruh positif terhadap defisit anggaran negara. Kemudian (impor) berpengaruh negatif terhadap defisit anggaran negara. Sedangkan (kurs jual) berpengaruh positif terhadap defisit anggaran negara (persamaan pertama). Variabel BI rate berpengaruh negatif terhadap obligasi sedangkan SBI dan defisit anggaran berpengaruh positif terhadap obligasi (persamaan kedua). Dan inflasi dan obligasi berpengaruh positif terhadap sukuk sedangkan defisit anggaran berpengaruh negatif terhadap sukuk. Kesimpulan: Sukuk dan obligasi masing- masing berkorelasi signifikan dalam peningkatan penerimaan sukuk dan obligasi. Baik sukuk maupun obligasi berpengaruh signifikan terhadap defisit anggaran. Kata Kunci: Sukuk, Obligasi dan Defisit Anggaran 107
2. Tazkia Islamic Finance and Business Review Volume 10 .2 1. Introduction The law principle can support a strong economic system in the country. In the structure of Indonesian law, the act (UU) occupies the second position after the Constitution 1945. It is a legal standard to regulate the activities in different spheres of life in Indonesia. Every country‟s activity has budget which regulated by the law. Based on UUD 1945 article 23 (1) of the fourth amendment, the state budget is as a form of state financial management determined by law annually and implemented with responsibility for the greatest prosperity of people”. Based on Islamic economics and finance, Al Quran and Sunnah are to be a normative rule, while the law will be a practical legal guide. Citing the objective of Islamic economics from Umer Chapra‟s book, Islamic economics aims to achieve „Falah‟, (red: the welfare is in the world and the day after) (Harahap, 2009). Basically, every person has the obligation to realize „falah‟, both the government and the public. There are a lot of economic activities that cannot be held by the markets, which requires the active participation from government and society (Center for Islamic Studies and Development, 2012). In fact, Indonesian state budget was deficit from 2010 to 2015. Minister of Finance stated that the ratio of deficit budget to GDP in 2010 was 0.73%, and it increased in the year after to 2.56% in 2015 (The Financial Memorandum of Indonesian Budget, 2015). Besides, the position of national debt tends to show an increasing from year to year. Total national debt was Rp222.8 billion in 2010, and it should increase to Rp479.7 billion in 2015 (Minister of Finance, 2015). The data showed that the deficit budget is fluctuated. It causes the increase of the national debt. Therefore, the country needs to add additional funds to cover the deficit. Based on the Article 12 paragraph 3 of Law No. 17 (2003) about State finance, the deficit budget is limited to a maximum of 3% of GDP, while the debt is limited to a maximum of 60% of GDP. One step to recover the government deficit is government financing, both debt financing and non-debt financing. Components of non-debt financing expenditure consist of the government investment fund and government capital (PMN), national education development fund, and guarantee obligations. While the debt financing expenditure consists of government securities (SBN), foreign loans and domestic loans. SBN issuance has two instruments, namely Conventional Based Government Securities (SUN) and Islamic Based Government Securities (SBSN). SUN is divided into four parts consisting of Government Bond (ON) and Government Bond Retail (ORI), Government Treasury Bill (SPN), and Government Bond Currency (ON Currency). While SBSN consists of Ijarah Fixed Rate 108 Comment [HF1]: Stands for? Government Capital
3. Tazkia Islamic Finance and Business Review Volume 10 .2 (IFR), Retail Sukuk, Sukuk of Hajj Fund (SDHI), Islamic Government Treasury Bill (SPNS), Sukuk Currency etc. In this study, the authors would discuss the comparison between bonds and sukuk to finance the deficit budget. In Indonesia, the provision of sukuk is regulated by UU No. 19 (2008) about Islamic Based Government Securities. The purpose of sukuk issuance is to finance the deficit budget, including the project development financing. The concept of debt financing through bonds and sukuk instruments is expected to be able to reduce the deficit budget. Those are also being an instrument for the development of infrastructure and other public facilities, such as roads, hospitals, and public buildings. Diyanti (2011) in her study about Islamic Economic Overview on Sukuk Fund Allocations in the Indonesian Budget (APBN) concluded that the management of sukuk funds in Indonesia is used to finance the deficit budget. According to Salim (2011), sukuk can be an alternative source of financing the development.. The issuance of sukuk funds can be used to finance the state budget as a whole. Furthermore, sukuk has minimal default. Nasrullah (2015) stated that, first, issuance of Bond (SUN) has a negative impact on the posture of the state budget, which makes the lack of fiscal space. Part of bond issuance (SUN) is used to pay old debts, and then the government often makes refinancing. While, sukuk can minimize the risk of the default (debt trap) because sukuk issuance requires underlying assets as the basis for the transaction. Second, the fiscal burden due to debt interest payments. It can be seen from the increasing of SBN interest rate risk. Indicator of interest risk is likely to decline fluctuated, but the risk of interest payments leads to increase the outstanding of portfolio debt. Extra costs of interest fluctuating will not occur in Sukuk instrument because the payment of profit to investors will be adjusted with the contract agreed based on profit sharing. Third, the Fiscal Burden due to exchange risk payment, basically either Bonds or Sukuk will face exchange rate risks which can increase fiscal burden as a result of the decline in the exchange rate. However, sukuk issuance is able to minimize the payment due to exchange rate risk because it uses the unique system, such as profit-sharing scheme and underlaying asset. Based on the description above, this study will discuss about the sources of deficit budget financing (APBN) in Indonesia. Then, this study is conducted to compare sukuk and bond absorption to finance the deficit budget and which variable that has significant effect on deficit budget. 2. Methodology 2.1. Type and Sources of Data 109
4. Tazkia Islamic Finance and Business Review Volume 10 .2 The data used in this study are secondary data that employ the simultaneous equation model for the monthly data, period February 2009- December 2015. The population used is Indonesia during this observation. In general, the data are obtained from Bank of Indonesia, The Central Bureau of Statistics (BPS), Minister of Finance, IDX, and Minister of Trade. The other data are collected from other sources such as scientific journals and literature studies. The computer programs used are Eviews 7.0 and Microsoft Excel. 2.2. Research Variables In the simultaneous equations, the dependent variable can also act as an independent variable. There are three equation models in this study. The dependent variables which are used in this study are deficit budget, bond and sukuk. The deficit budget variable uses dummy data, 1 = surplus and 0 = deficit. While the independent variables used are export, import, exchange rate, bond, sukuk, inflation, BI-Rate, Certificate of Bank of Indonesia (SBI), Islamic Certificate of Bank of Indonesia (SBIS) and deficit budget. The first equation shows that the deficit is a function of exports, imports, exchange rate, bond and sukuk. The second equation shows that the bond is a function of inflation, BI rate, Certificate of Bank of Indonesia (SBI), deficit and sukuk. In addition, the third equation shows that sukuk is a function of inflation, Islamic Certificate of Bank of Indonesia (SBIS), deficit and bond. 2.3. Analysis Method The analytical method used in this study is simultaneous equations. Simultaneous-equations system is a set of equations, which the dependent variable may also be the independent variable in some other equations. In another sense, the certain variables can have two roles in an equation system simultaneously, namely as dependent variable and independent variable. Thus, the dependent variable (Y) is not only determined by the independent variable (X), but also certain independent variable (X) can be determined by dependent variable (Y), so that the X and Y variables are determined simultaneously (Indra, 2014). The variables of simultaneous equations model can be divided into: 1. Endogenous variable is variable which determined in the equation system. Although this variable may also appear as independent variable in the equation system. 2. Exogenous variable is variable which not determined directly in the system. This variable causes the movement of the endogenous variables in the system. 2.4. Identification Model There are two methods that can be used to identify simultaneous equations model: 110
5. Tazkia Islamic Finance and Business Review Volume 10 .2 2.4.1. Order Condition (a necessary condition for identification) Koutsoyiannis (1977) stated that an equation must be identified in the simultaneous model to get parameter estimation. To be identified, the following conditions must be met (order condition): ) With: K = Total variable in the model (endogenous variable and predetermined variables). M = Number of endogenous and exogenous variables are included in a specific equations in the model. G = Total equation (the number of endogenous variables). If (K-M) is equal with (G-1), then an equation in the model is exactly identified; and if (K-M) is smaller than (G-1), so the equation is not be identified (under identified); in addition, if (K-M) is greater than (G-1), so the equation is over identified. Therefore, each of equation has to be identified, then the parameter model can be estimated. 2.4.2. Rank Condition (Terms Sufficient for Identification) Rank condition test is identified by determinant matrix. It can be concluded as follow: Matrix A = Number of rank matrix. G = Total equation (the number of endogenous variables). 1. If (K-M) is equal with (G-1) and rank matrix A = (G-1) then the equation model is exactly identified. 2. If (K-M) is greater than (G-1) and rank matrix A > (G-1) then the equation model is over-identified. 3. If (K-M) is smaller than (G-1) and rank matrix A < (G-1) then the equation model is under-identified. 2.5. Estimation Method Simultaneous equation model requires identified model in the structural equations, either exactly identified or over-identified. If the equation model is exactly identified, so it can use Indirect Least Squares (ILS) method. And if the equation model is over identified, so it can use Two-Stages Least Squares (2SLS) method. Two Stage Least Square method can be used to obtain a consistent estimation, either for exactly identified equation or over-identified equation. 111
6. Tazkia Islamic Finance and Business Review Volume 10 .2 In addition, the 2SLS method also can provide standard error of the structural parameter estimation directly. 2.6. Simultaneous Equation Model The equations as follow: Deficit = λ0 + λ1 export + λ2 import + λ3 exchange rate + λ4 bond +λ5 sukuk + ε1t Bonds = β0 + β1 inflation + β2 BI rate + β3 SBI + β4 deficit + β5 sukuk + ε2t Sukuk = C0 + C1 inflation + C2 SBIS + C3 deficit + C4 bond + ε3t Based on explanation above, the first equation shows that, the deficit = f (exports, imports, foreign exchange, bond, sukuk). The second equation shows that the bond = f (inflation, BI rate, SBI, deficit, sukuk), and the third equation, sukuk = f (inflation, SBIS, deficit, bond). First, we are ought to analyze the order condition and rank condition analysis from the simultaneous equations above. Whether the equations above being under identified, just identified or over identified. According to Gujarati (2003), if a simultaneous equation model is only identified, then it can be analyzed by the indirect least squares (ILS) method. However, if the simultaneous equation model is over identified, it cannot only be analyzed by ILS method, but it should use Two Stage Least Square (2SLS) method, so that the processed data are not biased. The first method of identification is order condition to determine the equations above including to underidentified, just identified, or over-identified as follows: Table 1. Identification Model with Order Condition The Equation K-M G-1 Result Equation 1 4 2 over identified Equation 2 4 2 over identified Equation 3 5 2 over identified Furthermore, the process of rank condition uses determinant matrix, and the equation above can be rewritten into: Deficit - λ0 - λ1 export - λ2 import - λ3 exchange rate - λ4 bond - λ5 sukuk = ε1t Bond - β0 - β1 inflation - β2 BI rate - β3 SBI - β4 deficit - β5 sukuk = ε2t Sukuk - C0 - C1 inflation - C2 SBIS - C3 deficit - C4 bond = ε3t The next step is to identify each equation as the following: 112
7. Tazkia Islamic Finance and Business Review Volume 10 .2 Table 2. Identification Model with Rank Condition 1 Def Export Import Exc. Rate Bond Sukuk Inf BI rate SBI SBIS -λ0 1 - λ1 - λ2 - λ3 - λ4 - λ5 0 0 0 0 -β0 - β4 0 0 0 1 -β5 - β1 - β2 - β3 0 -C0 - C3 0 0 0 -C4 1 - C1 0 0 - C2 From the Table 2, it can be obtained the matrix for each of the following equations: The first equation: Table 3. The First Equation with Rank Condition 1 Def Export Import Exc. Rate Bond Sukuk Inf BI rate SBI SBIS -λ0 1 - λ1 - λ2 - λ3 - λ4 - λ5 0 0 0 0 -β0 - β4 0 0 0 1 -β5 - β1 - β2 - β3 0 -C0 - C3 0 0 0 -C4 1 - C1 0 0 - C2 The second equation: Table 4. The Second Equation with Rank Condition 1 Def Export Import Exc. Rate Bond Sukuk Inf BI rate SBI SBIS -λ0 1 - λ1 - λ2 - λ3 - λ4 - λ5 0 0 0 0 -β0 - β4 0 0 0 1 -β5 - β1 - β2 - β3 0 -C0 - C3 0 0 0 -C4 1 - C1 0 0 - C2 The third equation: Table 5. The Third Equation with Rank Condition 113
8. Tazkia Islamic Finance and Business Review Volume 10 .2 1 Def Export Import Exc. Rate Bond Sukuk Inf BI rate SBI SBIS -λ0 1 - λ1 - λ2 - λ3 - λ4 - λ5 0 0 0 0 -β0 - β4 0 0 0 1 -β5 - β1 - β2 - β3 0 -C0 - C3 0 0 0 -C4 1 - C1 0 0 - C2 All of determinant matrix above (value A) consist of two rank matrix (A), and the determinant matrix of each equation compared to the value of G (endogenous variables in the model) namely 3 -1 (G-1). Then the determinant matrix (A) is equal to value (G- 1) = 2. So, the data is able to be identified. 3. Results and Discussion 3.1. The Concept of Sukuk and Bond Issuance In the history, Umar bin al-Khattab was the first caliph who made sukuk. It was used to pay state employee salaries. It was developed in the 4-5 Hijriyah century. A buyer can send a sukuk to a merchant. On the sukuk, it is written the name of the desired goods, the price of goods, and the signature of the buyer. Then the merchant sends the goods to the buyer, when the merchant meets the buyer at the appointed time, then he hands the sukuk to the buyer, and the buyer pays according to the price of the goods (Fatah, 2011). In the contemporary, the emergence of sukuk is backed by efforts to avoid the practice of usury that occurs in conventional bonds. Furthermore, it becomes an alternative financing instrument for entrepreneurs or countries in accordance with sharia. It is supported by Fatwa Majma 'alFiqh al-Islâmî (1990) and DSN-MUI No. 32/DSN-MUI/IX/2002. Sukuk is an instrument which is used as a tool to absorb capital from domestic and foreign. It can be used by the government to get the capital for doing a project such as development project. Khan (2016) said that sukuk provides an alternative type of long-term financing for key sectors such as infrastructure. It has recently emerged as an important element in funding government projects. Rini (2012) also stated that the benefits of sukuk are as a diversification of funding sources to finance infrastructure development for the state, and business expansion for the corporation. In addition, it also plays a role in the growth of real sector. Sukuk is one form of Islamic financial instrument that has been widely published either by corporations or countries. In some countries, sukuk has become important instrument to finance state budget, such as Malaysia, Bahrain, Brunei Darussalam, United Arab Emirates, Arab, Qatar, Pakistan, State of Saxony Anhalt – Germany and Indonesia (Fatah, 2011). 114
9. Tazkia Islamic Finance and Business Review Volume 10 .2 In addition, it has an underlying asset that can make sukuk can be interesting for investors. Furthermore, it showed the rapid development over the past seven years, from 2008 to 2015. According to Hariyanto (2015), the Directorate of Islamic Financing and Risk Management (DJPPR), the issuance of sukuk showed a very significant improvement. In 2008, sukuk was only amounted to Rp4.7 trillion, then it increased to Rp247.5 trillion in 2015. Although the sukuk market has increased, it still requires a close cooperation among financial experts and Shariah scholars on one hand and more interaction among Shariah boards on the others. The focus of the Islamic capital market shall not be only on how to raise the funds, although these are valid and well needed objectives, but also to be Shariah compliant first and foremost. It would help in the growth of real economy and socio-economic development of the society (Al- Amine, 2008). While bond is derived from the Dutch language, “the obligate” called bonds which means a contract. In the decree of President No. 775/KMK 001/1982, it is stated that the bonds are a type of securities in the form of debt certificates of money from the public (investor) in certain form for three years period at least by promising interest which the amount and the payment has been pre-determined by the issuer (Sunariyah, 2006). In essence, a bond is a bill of money for the issuer. The bondholder earns a certain interest rate which paid by the company. Furthermore, the purpose of bond is to; (1) finance the deficit budget, (2) cover lack of short-term cash and (3) manage the country's debt portfolio. The central government is authorized to issue bonds. On this issuance, the government is obliged to pay interest and principal at maturity. The fund for payment of bond interest and principal (SUN) are provided in the Indonesian budget (APBN). Afshar (2013) said that both conventional bonds and sukuk attempt to mobilize the funds from surplus spending units to shortage spending units. There are fundamental risks or return differences between the both. In the conventional bond, the underlying asset is money (debt), while in the Sukuk, the underlying asset is indeed an asset. The two solutions are clearly not identical; the fundamental difference in their structure has a great religious difference but virtually no financial differences. The conventional bonds are based on debt instrument, while sukuk financing is based on equity method. 3.2. Comparison of Sukuk and Bond with Simultaneous Equations Method Simultaneous equations method is the set of equations that the dependent variable in one or more equations can also be an independent variable in some other equations. As described before, simultaneous equations will be tested by the order condition and rank condition analysis 115
10. Tazkia Islamic Finance and Business Review Volume 10.2 to determine the equations, are those being under-identified, just (exactly) identified or overidentified. Finally, the rank condition results showed just-identified, and order condition results showed over-identified. Then, it can be identified further by E-Views 7. 3.3. Result A. Equation 1: Y (Deficit) = β0 + exportβ1 - importβ2 + exchange rateβ3 + bondβ4 - sukukβ5 The first equation shows that deficit is a function of export, import, exchange rate, bond and sukuk. Import variable based on the simultaneous equation results in table 3.1 has significant negative effect on the deficit budget in the level of 1% with a determination coefficient (R2) of 77.6%. This means that if import increases to US$ 1 billion, it is expected to decrease the financing of deficit budget amounted to US$ 0.4 billion. According to Rahardja and Manurung (2005), the calculation of national income consists of three methods: production approach (output approach), income approach method, and expenditure approach method. As known that, Indonesia uses the production and expenditure approach to calculate the national income. In the expenditure approach method, it consists of several important aspects, namely private consumption, investment, government expenditure, export and import in the equation Y = C + I + G + (X-M). From the TSLS results below, it is known that imports have a significant negative effect on the deficit budget. On other word, it can lower the deficit budget financing. Based on the econometric results, it can be concluded in accordance with the existing theory of national income calculation. If government spending on raw materials such as machine (imports) increases, then it is expected to increase state budget revenues in the long term due to the increasing of production. Ultimately, it will affect the decrease of deficit budget financing. Additionally, exchange rate variable affect deficit budget positively in the level of 5% with a determination coefficient (R2) of 77.6%. This means that, if exchange rate depreciates by Rp1 thousand, then it is expected to increase the financing of deficit budget as big as Rp0.34 thousand. In the economics theory, if the value of the rupiah depreciates to dollar, it will increase the cost price of production, so it will cause a decrease in the number of production and purchasing power. Then, it will affect the state budget revenue from the household and the entrepreneur sector. Besides that, it will affect the payment of debt, both domestic and foreign. Therefore, if rupiah depreciates, it will have an impact on the burden of deficit budget financing. Moreover, bond variable affect deficit budget in the level of 1% with a coefficient of determination (R2) of 77.6%. This means that, if the amount of bond issuance increases by Rp1 trillion, then it is expected to increase the deficit budget as much as Rp0.04 trillion. This is due to the issuance of bonds based on debt and interest. According to Hariyanto (2014), the bond is 116 Comment [HF2]: Too many repetition statements in the discussion. It sounds a bit boring. Try to use different words to make your result more beautiful to read