RHB FIC Global Sukuk Markets Weekly - 4/4/16

4 April 2016

Global Sukuk Markets Weekly

Producers’ Freeze Talks Gets Tougher; Fitch Downgraded Sime Darby to BBB+

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices closed higher at 103.1 (+0.34%) and 158.1 (+0.32%) respectively, as yields declined 6.7bps to 2.495%. The gains were led by QATAR ’23, MALAYS ’25 and PETMK ’20. Oil prices ended the week at USD38.67/bbl (-4.4%) after the Saudi’s deputy crown prince, Mohammed bin Salman said the kingdom will freeze its oil production only if Iran and other major producers agree to curb theirs, leaves the outcome of the Doha producers’ freeze talk on 17 April in doubt. While Fed Chair Janet Yellen reiterated her views to “proceed cautiously” in raising interest rates given continued challenging global conditions that could weigh on domestic growth, after the recent hawkish comments by Fed Harker, Williams, Lockhart and Bullard.

¨   Saudi’s money supply M3 growth decelerated at -0.9% YoY in Feb-16 from 3.7% in Jan-16 and 2.6% average in 2015, resulting the Saudi Riyal Interbank Average Offered Rate for 12-month to climb to 7-year high of 2.001% (see Chart of the Week). The fall in money supply adjusts in line with net foreign assets which was down by 1.7% to SAR2.2trn. Saudi banks’ loan-to-deposit (LTD) ratio climbed to 88.1% in Feb-16 from 86.1% in Jan-16, following relaxation of LTD ratio to 90% last February. Accordingly, Saudi’s CDS tightened 2.6bps to 155bps. Elsewhere, Turkey’s economy grew at 5.7% in 4Q15 and 4% over 2015 as a whole. Trade deficit narrowed to USD3.2bn in Feb-16 from USD3.8bn in Jan-16 with exports rose 1.4% first time in 4 months, which saw its CDS tighten 12.9bps to 259.7bps.

¨   On ratings, S&P affirmed Malaysia rating at A-/Sta on expectations of credible fiscal and monetary policies, strong external position and fairly diverse economy that could absorb weakness in the oil and gas sector. Hong Kong’s (Aa1/AAA/AAA) outlook was revised to negative from stable by S&P to reflect economic imbalance in China, given financial and economic linkages as well as the ultimate sovereign authority of China. This was followed by the same revision on China’s outlook. Sime Darby (Baa1/BBB+/BBB+) was downgraded 2 notches to BBB+ from A with a negative outlook by Fitch, reflecting the extended pressure on high leverage, with  delays in debt reduction plans due to the challenging operation environment in the industrial and palm oil segments.

¨   In the MYR primaries, Malaysia Airline Berhad (NR) priced MYR1.5bn Pc23 sukuk at profit rate of 6.10%.

SOVEREIGN UPDATES

Country/Issuer	Update	RHBFIC View
Pakistan (B3/Sta; B-/Pos; B/Sta)	IMF completed its tenth review on 25 Mar under the Extended Fund Facility (EFF) three year program totaling SDR4.393bn (USD6.64bn at the time of approval in Sep-13)  – allowing further disbursement of SDR360m (c.USD502.6m) which brings the total disbursement to date to Pakistan to SDR3.96bn (USD5.53bn) or 90% of the EFF program total. The EFF program is scheduled to end by Sep-16.   Highlights of Pakistan’s progress mentioned by the IMF were: 1.     Economic activity gradually gained strength, and short term vulnerabilities have receded. 2.     Monetary policy stance remains appropriate – the establishment of an independent monetary policy committee (announced in Jan-16) is a key step to central bank autonomy. 3.     Financial sector resilience and capital buffers.	Positive. Pakistan’s credit quality has gradually been improving – keeping PKSTAN 19 attractive among the sovereign names in the USD sukuk space. We continue see opportunity for tightening given: (i) its steady policy progress with the collaboration of the IMF, (ii) relatively strong growth potential as real GDP has improved from 0.4% in 2009 to a forecasted 4.5% in 2015, and (iii) improvement in balance of payments from sizeable remittances amounting to USD9.7bn in Jul-Dec 2015 (2H15: +6% YoY). We have seen PKSTAN 19 tighten by c.100bps since our recommendation on 22 Jan 16 (please refer to our report titled “PKSTAN 19 for Yield Seekers within Non-IG Sovereign”) - in line with our year’s strategy to remain selective in HY sovereign names.