Macroeconomic Determinants of the Capital Market in Indonesia: A Comparative Analysis between Sukuk and Bonds Markets

Background: Sukuk is one of the Islamic financial instruments that are used to provide domestic financing for fiscal deficit. Sukuk could support domestic financing and ensure the impacts of the volatility of the business cycle to the promotion of economic growth in a country. The purpose of this study is to empirically explore the macroeconomic determinants of Islamic-(sukuk) and conventional-bond markets in Indonesia. It also attempts to assess the short- and long-run equilibrium between the macroeconomic determinants and both Islamic and conventional bonds markets in Indonesia. This is the first study to adopt the cointegration and VECM approaches to investigate empirically the sovereign sukuk and bonds markets in the largest Muslim populous country, Indonesia.
Methods: Focusing on the period from January 2010-November 2017, various time series analysis methods (i.e., cointegration, vector error correction model (VECM), and multivariate causality approaches) are used to explore the determinants of Islamic and conventional bonds and their short- and long-run equilibrium. Results: The study documented that the sukuk market is only affected and Granger-caused by the exchange rates, while the bond market is significantly affected by the interest rates, exchange rate and price level. The finding of independence of sukuk market from interest rates further confirmed that the trading of the sukuk in Indonesia has been in harmony with the tenets of Shari’ah finance principles. Conclusion: The sukuk market is more stable than bonds market in the economy. Therefore, the government is recommended to maintain the stability of exchange rate in promoting the sukuk market, while in enhancing the development of the bonds market, the stabilization of inflation, interest rates and exchange rate should be a focus of macroeconomic policy design by the relevant authorities in Indonesia.