Credit Market Watch: Summary for week ending 11-May
· MYR Credit:
Ø 10y MGS yield closed at 4.13% last week prior to the general election. Corporate bond yields were unchanged from the previous week and trading volume amounted to just MYR287m in the holiday-shortened week. BNM maintained the OPR at 3.25% to support steady economic growth while inflation is likely to be lower this year. Local FX market started the first trading day after elections with a tempered reaction to the surprise election outcome with USDMYR only up slightly at 3.98/99.
Ø MGS outlook: In our Volatility is Your Friend report, we raised our MGS outlook to mildly bullish as we see balance of risks tilted to the positive side and market uncertainties may fade quickly. Domestic bids and healthy external reserves are expected to cushion foreign outflow risks. Wider fiscal deficit, while a valid concern, may not be significant as there is possibility for offsetting revenue and optimization of expenditures. Rating agencies are also likely to take a “wait and see” approach.
Ø Initial thoughts on credit: The change in government is unlikely to affect the credit risk of GG bonds, while reviewing large infrastructure projects may mean less GG supply in the medium to long term. Toll road issuers would be affected if tolls were to be abolished, though it will be in gradual stages and the government mentioned it will provide fair compensation. We have below a list of toll road names. There is uncertainty in the construction sector as mega infrastructure projects and China-related names such as ECRL could be reviewed. Projects linked to government payments such as Aman Sukuk may also be at risk of being reviewed as PH seeks to optimize expenditures.
Ø Macro: Our economic research team kept 2018 GDP growth forecast at 5.3% pending clarity on the new government’s economic policies and ahead of 1Q18 GDP numbers. They are slightly positive on consumer spending prospect, but investment outlook is less certain as businesses take a cautious stance for now and amid potential government reviews of mega infrastructure projects. PH manifesto to abolish GST and replace it with SST as well as reintroduce “targeted” fuel subsidies pose wider fiscal deficit risk, but more details on the new administration’s revenue and expenditure are required before a conclusion can be made.
Ø Relative value: Little secondary trading activity in the 2-day working week for a meaningful comparison.
· Asian Credit:
Ø UST curve rose 2-5bps along the 2y10y slope WoW. 10y UST yield was 2bps higher at 2.97% while 2y yield rose 4bps, compressing the 2y10y spread to 44bps. 10y UST has been rather well behaved after breaching the 3-handle, and a slight miss in MoM CPI at 0.2% compared to 0.3% consensus could keep yields contained for now.
Ø In Asian USD credit, market traded in range and credit spreads were overall stable, with JACI composite +1bp to 242bps, JACI IG unchanged at 174bps and JACI HY +4bps to 471bps WoW. In USD sovereign, MALAYS saw selling and widened by about 8-10bps WoW after the surprised Election outcome. Other Malaysian names e.g. PETMK, EIBMAL, TELMAL and TNBMK were about 5-15bps wider which we think is an expected market impulse because of regime change and the selloff is actually not severe, except for OGIMK, the1MDB-linked USD bonds, which was sold off >300bps higher at one point. Meanwhile, INDONs, after experiencing weakness recently, were well supported grinding 5-12bps lower WoW, while CHINA, KOREA and PHILIP were roughly between 3-10bps higher in yields.
Ø Rating changes: MNC Investama TBk PT’s (BHIT) corporate family rating was upgraded to B3 from Caa3 by Moody’s, citing improved debt maturity profile which extended to 2021 on standalone basis as 2018 notes will be fully repaid following the exchange completion. However, Moody’s has a negative outlook on the rating due to BHIT’s weak liquidity position, holding company position, reliance on dividends and high leverage with consolidated debt/EBITDA of >5x.
· CDS: EM Asia CDS spreads generally showed a tightening bias, with Indonesia -5bps, Korea -2bps, China -1bp, while Philippines and Thailand unchanged, except for Malaysia which saw 5y CDS widening 10bps WoW because of the Election results.
Winson Phoon, ACA
(65) 6231 5831
Se Tho Mun Yi
(603) 2074 7606
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