Bank Indonesia Cut Rates for Fourth Time; Moodys’ Raised Emaar Sukuk to Baa3 and EIB Sukuk to A3

20 June 2016

Global Sukuk Markets Weekly

Bank Indonesia Cut Rates for Fourth Time; Moodys’ Raised Emaar Sukuk to Baa3 and EIB Sukuk to A3

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices ended relatively flat at 103.9 (+0.02%) and 159.8 (+0.01%) respectively, with yields tightened marginally by 0.6bps to 2.470%. Combined with the Fed’s dovish meeting (June 15), uncertainty over the Brexit referendum  jitters (June 23) and mixed signals from China over slowing economy bring the risk-adverse sentiment. The top performers over the week were INDOIS 3/26 and GS 9/19, which moved -11bps to -13bps; while the underperformers were dominated by banking papers — EIB 1/17, Noor Bank B3T1 and DIB B2T1 which widened 12bps each.

¨   Bank Indonesia (BI) cuts key policy rates by 25bps in a surprise move, with the BI rate, deposit facility rate and 7-day reverse repo rate now stand at 6.50%, 4.50% and 5.25% respectively. In addition to the rate cut, BI also raised the minimum threshold on loan-to-funding ratio to 80% from 78%. Indonesia risk premiums widened 1.5bps to 196.0bps. Elsewhere, Saudi Arabia missed out on MSCI emerging markets status as MSCI stated easier access for foreign investors is needed, as its CDS widened 4.4bps to 185.5bps. Similarly, Turkey CDS added 9.6bps to 264.0bps which was led by lower government budget balance of TRY3.7bn in May-16 from TRY5.4bn in Apr-16; and high unemployment although it edged down slightly to 10.1% in Mar-16 from 10.9% in Feb-16. Consensus expect further monetary easing by the Central Bank of Turkey (CBRT) will not be warranted on this June 21 meeting.

¨   On ratings, Moody’s upgraded Emaar Sukuk’s rating to Baa3/Sta from Ba1 to reflect ownership in mature recurring-revenue assets (which contributed about half of Group’s EBITDA in 2015), substantial property sales backlog of AED40.3bn, access to sizeable 27m sqm land bank and robust liquidity. Moody’s also upgraded EIB Sukuk Company’s rating to A3/Sta followed by the same revision on its guarantor — Emirates NBD’s rating.

¨   In the MYR space, Bank Rakyat issued MYR300m 10nc5 B3T2 at 4.95% via Mumtaz Rakyat Sukuk (RAM: AA3), while TSH Sukuk (MARC: AA-) printed 5y at 5.10% and 7y at 5.30% on combined MYR150m. Meanwhile, Islamic Development Bank (MARC: AAA) plans to issue MYR400m Sukuk Wakalah through Tamadun Services Bhd (MARC: AAA).  

SOVEREIGN/CORPORATE UPDATES

Country/Issuer	Update	RHBFIC View
Indonesia (Baa3/Sta; BB+/Pos; BBB-/Sta	Bank Indonesia (BI) loosens monetary policy by cutting the reference rate by 25bps to 6.5% at the 16-June MPC meeting. This makes it the fourth cut this year, totaling to a 100bps tightening to date. BI also trimmed its seven day repo rate by 25bps tp 5.25%. The 7 day repo rate will be the new benchmark interest rate to take effect in August 2016, as announced by BI in Apr-16.	Mildly positive. As Indonesia’s inflation eased to 3.3% YoY in May-16 (Apr-16: 3.6% YoY) from a high of 8.4% YoY in Dec-14, this provided room for more accommodative policy – after halting accommodative policy in April and May. BI indicated that the ‘Brexit’ vote would create volatility to the Rupiah, nevertheless will remain manageable as exposure to Europe is limited. We believe that BI could be positioning itself prior to the Brexit referendum, where the national declaration will be announced on 24-June. Continue to hold INDOIS’19, given that it has tightened 50bps year-to-date to 2.54% (please refer to RHB FIC Sukuk & RV Idea publication on Indonesia’s INDOIS 19 on 4 April 2016).