ICD Outlook Downgraded to Negative; South Africa’s MTBPS Disappoints

31 October 2016

Global Sukuk Markets Weekly

ICD Outlook Downgraded to Negative; South Africa’s MTBPS Disappoints

Highlights & Performance

¨   Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) closed with modest losses at 105.5 (-0.05%) and 163.6 (-0.16%) respectively. The index yield rose 2.4bps to 2.458% as 10y US Treasury note hit a five-month high at 1.847% (+11.2bps), and as oil prices softened following Iraqi oil minister’s comments on exemption from OPEC output curbs.

¨   Abu Dhabi Islamic Bank (ADIB, A2/NR/A+) weighed heavily (+18 to +81bps) after it reported a relatively flat 3Q16 net profit of AED509m (3Q15: AED503m). First Gulf Bank (FGB, A2/A/A+) reported a 32% YoY increase in net profit to AED1.9bn due mainly to a AED437m one-off gain on sale of investment properties, with 2.3% YoY increase in interest income. FGB 1/17 was seen last traded at 0.59% (-20bps).  On the other hand, Dar Al-Arkan (B1/NR/NR), one of Saudi Arabia’s largest property developers, reported a 3Q16 net profit of SAR112m (+21.3%) driven by 14% revenue growth and 33% lower general, administrative, selling and marketing expenses; with DARALA 5/18 widening 14bps to 6.97%.

¨   Indonesia’s parliament approved Government’s 2017 Budget, with fiscal deficit target of 2.41% of GDP and GDP growth target of 5.1%. Indonesia’s CDS widened by 2.6bps to 154.0bps. Elsewhere, Moody’s flagged concerns over Malaysia’s medium-term goal of a balance budget by 2020 in an absence of major fiscal reforms, combined with falling revenues and weakening debt affordability; whereas Fitch opined that the budget is achievable and is better placed than other net commodity exporters to cope with the negative shift in terms of trade, with its risk premium trading at 123.7bps (+1.2bps). Saudi Arabia’s non-oil exports fell at a slower pace of 11.1% in August (Jul-16: 27.2%) however, its net foreign asset continues to fall for a fourth consecutive month to SAR2.05bn. Saudi Arabia’s CDS tightened slightly by 1.5bps to 133.5bps. 

¨   Over in the primary market, KT Kira Sertifikalari Varlik Kiralama A.S (NR/NR/BBBe) priced USD500m 5y sukuk at 5.136% (MS+385bps). Meanwhile, Islamic Development Bank (Aaa/AAA/AAA) is expected to issue a 5y note of more than USD1.0bn after the US presidential elections (8-Nov).

¨   Turning to MYR primaries, Celcom Networks (MARC: AA+) issued MYR500m 5-10y sukuk at 4.85-5.27%, with proceeds likely be used to finance MYR817m spectrum fees due Nov-16; whereas Maxis Broadband Sdn Bhd (NR) sold MYR500m 4y sukuk at 4.700%. Elsewhere, Perbadanan Kemajuan Negeri Selangor (RAM: AA3) sold MYR200m 1-2y sukuk at 4.25-4.45%. Gas Malaysia (MARC: AAA) priced MYR100m 3y sukuk at 4.150% which will be earmarked for its pipeline expansion plan.

SOVEREIGN/Corporate UPDATE

Country/Issuer	Update	RHBFIC View
Islamic Corporation for the Development of the Private Sector (ICD) (Aa3/Sta; AA*-; BBB-/Neg) Note: *- : Under CreditWatch Negative since 1 Sept 2016. Should resolve placement by end-Nov 2016	Fitch revises ICD’s outlook to Negative from Stable, but reaffirms AA rating. The outlook revision was mainly due to:  ·         Saudi Arabia saw multi notch downgrades and has been under Negative outlook since August 2015 – impacting on its shareholder support, given that the kingdom owns 18.2% of ICD’s capital. Saudi is also the largest shareholder of Islamic Development Bank (IDB), of which IDB holds a 45.5% share of ICD.  ·         Failure to reduce the impaired loan ratio. The ratio is one of the highest among multilateral development banks (MDBs) at 22.5% as at end-1436H from 20.3% in 1435H. It is expected for the trend to be maintained in the medium term. Reserve coverage has been relatively weak. ·         There is material deterioration of the value of the bank’s equity portfolio. ICD holds a large portfolio of equity participants representing 63.1% of its banking portfolio at end 1436H, which constitutes as a substantial source of risk according to Fitch.	Neutral. We view this development as neutral as we believe that the impact of the outlook downgrade will be muted. This is mainly due to ICD’s main focus to support the economic development of its member countries, such as through the provision of finance for private sector projects.
South Africa (Baa2/Neg; BBB-/Neg; BBB-/Sta)	The Medium Term Budget Policy Statement (MTBPS) announcement on 26 Oct 2016 revised the 2016/17 consolidated budget deficit to 3.4% of GDP, higher than the original target of 3.2%. Fiscal tightening of ZAR23bn was noted for 2017/18 through a combination of new revenue and spending cuts. Despite the fiscal tightening, the Treasury expects the debt-to-GDP to peak at 53% in FY2018/19 versus previous estimate of a 51% peak in 2017/18.	Neutral. We believe this development is neutral on South Africa. The MTBPS revisions were informed by lower tax revenue collections than expected (shortfall of ZAR22.8bn or 0.2% of GDP), sluggish growth, and the need to allocate greater funding to Higher Education. In our view, the details on the MTBPS did not provide clear supportive structural reforms to help support growth, in line with views from S&P and Fitch. Moody’s opined that the MTBPS was challenged by slow progress and uncertainty around structural reforms to support growth.