Fitch Places Indonesia on Positive Radar; Saudi Budget Deficit Targeted at 7.7%

27 December 2016

Global Sukuk Markets Weekly

Fitch Places Indonesia on Positive Radar; Saudi Budget Deficit Targeted at 7.7%

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index closed with modest gains at 104.1 (+0.11%) and 160.6 (+0.21%) respectively; with the index yield falling 0.9bps to 2.908% along with mixed US economic data, which saw the Nov personal spending slow by 0.2% from 0.4%, while the 3QGDP was revised up to 3.5% from 3.2%. AUBKWK Pc10/21 (-76bps), DIBUH Pc3/19-1/21 (-26 to -16bps), ADIBUH Pc10/18 (-19bps) and DAMACR 4/19 (-19bps) were among the best performers.

¨   Saudi Arabia Budget 2017 projects a 33% YoY reduction in the budget deficit to 7.7% of GDP in 2017 from 11.5% in 2016 (see Sovereign/Corporate Update). Malaysia’s Nov CPI jumped larger-than-expected to 1.8% YoY from 1.4% in Oct-16, led by a 36.6% jump in oils and fats following the removal of subsidies for cooking oil. Further upward pressure on inflation is expected on account of higher administered prices, and pick-up in imported price pressures due to the weak MYR.

¨   Kuwait’s Warba Bank (Baa2/NR/A+) mandated nine banks to arrange a Tier 1 sukuk of up to USD250m which is expected to launch in 1Q17. The bank’s Tier 1 ratio as at Jun-15 stood at 21.0% (Dec-15: 24.9%). Moving to ratings, Fitch placed Indonesia on Positive outlook to reflect (1) track record of macroeconomic stability by the authorities and (2) strong structural reform drives that improve difficult business environment.

¨   Turning to MYR space, a new MYR500m sukuk Wakalah programme established by Lafarge Cement, the main operating subsidiary of Lafarge Malaysia, was assigned with a rating of AA2/Sta by RAM Ratings. The proceeds from the first issuance will be used to refinance existing MYR280m Lafarge Malaysia’s ICP maturing on 16 Jan next year. Meanwhile, the rating agency downgraded Al Bayan, a Saudi-based conglomerate, to D after it failed to redeem MYR100m sukuk on the maturity date of 16 Dec. Malaysia Building Society Berhad (MBSB) will commence negotiations with Asian Finance Bank, in its third attempt in about two years to become a full-fledged Islamic player.

SOVEREIGN/CORPORATE UPDATE

Country/Issuer	Update	RHBFIC View
Saudi Arabia (A1/Sta; A-u/Sta; AA-/Neg)	·        Saudi Arabia released its budget on 22-Dec, noting a projection of a 33% reduction in the deficit for 2017. Key points to note in the 2017 budget were: -   Spending is estimated at SAR825bn (1.8% below budget) while total expenditure is expected to be SAR930bn in 2017. -   Deficit is projected at 7.7% of GDP or SAR198bn in 2017, lower than 2016 estimated deficit at 11.5%. Deficit financed by debt and reserves. -   Revenue is expected to be 2.7% above target at SAR528bn, while oil revenue is projected at SAR480bn in 2017 versus SAR329bn. -   Non-oil economy is expected to rise to SAR212bn in 2017 from the estimated SAR199bn in 2016. -   The government is “very optimistic” on an oil price recovery in 2017 -   Government debt is projected at 12.3% of GDP in 2016 while the Budget noted that the debt ceiling is set at 30% by 2020. ·        GDP growth expected at 1.4% in 2016. The 2017 forecast was not mentioned in the Budget statement.	Neutral. We view this as a neutral development, given the credibility of the data despite it being mentioned as the most detailed budget in country’s history. For example its oil revenue is forecasted to be 10% higher than the 2016 estimate. We believe that this is not aligned with the agreement of Saudi Arabia with the OPEC, as the kingdom cuts 486 tb/d, one of the largest cuts among OPEC members. In our view, there are risks that lie in the continued reliance of oil as the Budget still depends on rising oil prices to balance the budget.  Nevertheless, there is a strong commitment and willingness in cutting its deficit, where it is positively viewed. The IMF expects for Saudi Arabia’s GDP growth to rise to 1.2% in 2016 and to improve in 2017 to 2%.