BI and CBRT Cut Another 25bps; Turkey Cut to Junk by Moody’s

26 September 2016

Global Sukuk Markets Weekly

BI and CBRT Cut Another 25bps; Turkey Cut to Junk by Moody’s

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index gained 0.40-0.58% to 105.7 and 164.3 respectively, with the index yield falling 9bps to 2.329% concentrated around Indonesian and Turkish Sukuk. The spreads such as INDOIS 9/24-3/26 (-26-18bps to 3.18-3.41%), TURSK 10/18-11/24 (-18-16bps to 2.74-4.35%), TUFIKA (-53bps to 3.64%) and KFINKK 5/19 (-43bps to 3.67%) tightened significantly on the back of the rally in USTs over the week. The Fed kept interest rates unchanged, but added that the case of a rate hike remains a strong possibility. Looking ahead, skepticism rose over a possible production freeze/ cut during the OPEC meeting (26-28 Sept) following the clash between Saudi Arabian and Iranian oil official over production limits last week.

¨   Bank Indonesia (BI) cut its 7-day reverse repo rate by 25bps to 5.00%, as expected, and signaled that headline inflation is to remain at the lower end of its 3-5% target range this year; with its risk premium adding 2.0bps to 147.9bps. Turkish CDS ended the week up 1.9bps to 247.9bps, even after the 25bps interest rate cut by the Central Bank of Turkey (CBRT) for a seventh straight month. In addition, the rating for Turkey was downgraded to Ba1/Sta from Baa3/*- by Moody’s premised on its weaker credit fundamentals and rising in external financing needs. Elsewhere, Malaysia’s August inflation picked up more-than-expected to 1.5% from 1.1% in July, led by a doubling in recreation and culture inflation to 3.6% from 1.7%, and a smaller margin of decline in transport at -6.7%. The pick-up in inflation is mainly the result of base effects from fuel adjustments. Hence, it is unlikely to significantly influence the monetary policy outlook, with focus remaining on the government fiscal policy stance in the Budget 2017 (21 Oct). Malaysian risk premium widened 2.5bps to 125.0bps.

SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
Saudi Arabia (A1/Sta; A-u/Sta; AA-/Neg)	The Saudi Arabian Monetary Agency (SAMA) injected SAR20bn (USD5.3bn) into the banking system via time deposits, and also introduced 7 day and 28 day repurchase agreements in support of more monetary policy tools to support the economy. This comes after the 3 month Saudi Interbank Offered Rate has jumped by over 200% since July 2015 to the highest level since 2009 (currently at 2.35% from below 1% in July-2015).	Neutral. We believe this action may indicate further calls to stabilise rates, not only in combating a liquidity crunch, but also ahead of the US Federal Reserve FOMC meeting. This will put some upward pressure on short term rates toward the end of the year. Further actions could be raising the loan-to-deposits ratio or by reducing bank reserves. We expect Saudi Arabia to raise more than USD15bn in October or November this year. The dollar revenues from the bond sale could be used to help plug its widening deficits, shoring currencies and stem the foreign currency exchange reserves bleed. We do not expect Saudi Arabia to remove its dollar peg, with the expected upcoming dollar bond sale and as the Kingdom’s fiscal austerity measures should be able to adjust to low oil prices.
Turkey (Ba1/Sta; BBu/Neg; BBB-/Neg)	·         Turkey’s central bank cut its overnight lending rate to 8.25% from 8.5%, making this the seventh consecutive month of rate cuts. Meanwhile, it kept its one week repo rate at 7.5% and its overnight borrowing rate at 7.25%. ·         Moody’s downgraded Turkey sovereign long term foreign currency credit rating by one notch from Baa3 to Ba1 with Stable outlook – putting Turkey in ‘junk’ status. The two key reasons for the downgrade are:  -       Increased risks related to the country’s sizeable external financing requirements -       Weakening in previously supportive credit fundamentals, particularly growth and institutional strength ·         Deterioration in credit strength is expected to continue over the next 2-3 years. The stable outlook is reflected in the government’s robust balance sheet.	Negative.  Cheaper Turkish names in upcoming issuances could pull in risk takers. Nevertheless, we remain cautious on Turkey’s institutional strength and monetary policy. The inflation rate remains high at 8.05% in Aug-16 despite dropping from 8.8% in Jul-16 as it remains above the central bank’s target of 5%. Turkey is likely to miss its 4.5% growth target in 2016, given that the GDP grew at a slower pace to 3.1% YoY in 2Q16 from 4.7% YoY growth in 1Q16.