GCC Follows Fed’s Hike Pathway; Maybank Establishes MYR10bn Sukuk Programme

19 December 2016

Global Sukuk Markets Weekly

GCC Follows Fed’s Hike Pathway; Maybank Establishes MYR10bn Sukuk Programme

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index closed lower WoW at 103.84 and 160.16 respectively, with the index yield rallying 8.7bps to 2.950% (a new level since 2015). EIBMAL 1/21 (+26bps), GBHK 6/20 (+19bps), ISDB 12/21 (+17bps), MALAYS 7/21 (+17bps), and KNBZMK 3/21 (+16bps) took the heaviest hits. The US Federal Reserve raised interest rates a second time to 0.50-0.75%, a level not seen since Jun 06, and forecast a faster pace of tightening with three hikes implied in 2017. The Fed action has contributed to the hikes in cost of credit benchmarks for GCC states except Oman — Bahrain (one-week deposit facility at 1.00%), Kuwait (discount rate at 2.50%), Qatar (QMR lending at 4.75%), Saudi Arabia (reverse repo at 75bps) and United Arab Emirates (25bps increase in certificates of deposits), leading to a higher cost of funding for banks which could partially be mitigated by the large proportion of sticky non-interest bearing deposits in the system.

¨   IMF expects Malaysian economy to grow faster in 2017 at 4.5% (from 2016e: 4.2%), underpinned by strong private consumption growth amid steady labour market and fiscal measures. Investors will be eyeing this week’s CPI (21 Dec) and foreign reserves (22-Dec) data. On the other hand, Bank Indonesia (BI) maintained its 7-day reverse repo rate (RRP) at 4.750% as expected. Its trade balance narrowed to USD0.8bn in Nov-16 from previously USD1.2bn as export growth doubled for the first time in two years at 21.3% while import growth rose at 9.9%. Correspondingly, CDS for Malaysia and Indonesia widened to 144bps (+5.2bps) and 164bps (+7.9bps) respectively.

¨   Turning to MYR primaries, Maybank (RAM: AAA) established a MYR10.0bn senior and subordinated sukuk Murabahah programme for financing of investments in Shariah-compliant instruments and Islamic business activities.

SOVEREIGN/CORPORATE UPDATE

Country/Issuer	Update	RHBFIC View
Turkey (Ba1/Sta; BB/Sta; BBB-/Neg)	·         Turkey’s economy contracts by 1.8% YoY in 3Q16 (2Q16: +4.5% YoY) driven by a collapse in private domestic consumption which fell by 3.2% YoY. Improved government spending (+23.8% YoY) was not enough to bolster growth, while investment fell by 0.6% YoY. ·         According to 2015 data from Turkstat, domestic consumption takes up a share of 69.1% of GDP, while government expenditure takes up 15.7%, and investments 20.4%.	Negative. We believe that rising security threats (suicide bombings and diplomatic rift with Russia) has impacted on tourism revenue, which is a key economic driver. In addition to this, a broader emerging market sell-off has also impacted Turkey, given that private sector foreign currency debt was at USD294bn in Sep-16 which takes up c.37% of GDP. We hold a negative view on this development as we believe the state of emergency that is still in play will continue to hold back consumption due to loss of confidence in the sovereign. We also believe that the impact on the economy due to the anticipated continued Fed tightening going into 2017 on the lira and inflation could lead to tighter monetary policy. The CBRT had already hiked its one week repo rate in Nov-16 for the first time since Jan-14 to 8% from 7.5%. The TURKSK curve bear steepened during the week, with TURKS 24s yield widening 9bps WoW to 5.79%.