Rally Continues; Saudi Arabia Deflation Likely Short-Lived

24 February 2017

Global Sukuk Markets Weekly

Rally Continues; Saudi Arabia Deflation Likely Short-Lived

Highlights & Performance

¨   Index: Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) index continues its rally streak for the fourth consecutive week, rising to 105.32 (+0.19% WoW) and 163.3 (+0.21% WoW) respectively, with the index yield tightening 3.1bps WoW to 2.774%. Gains were supported by DIBUH Pc3/19 (-33bps), AXIATA 11/20 (-22bps), and AXIATA 26 (-17bps) during the week. The minutes of the Jan 31- Feb 1 FOMC meeting indicated that there was little urgency to rush for another hike, nevertheless officials seemed cognizant of the potential lift. The minutes also noted that talks of unwinding of the Fed’s balance sheet was in extremely preliminary stages, indicating that policy makers are inclined to wait till the USFFR is significantly higher.

¨   Rating Changes: There have been no rating changes however it is important to note that the 5y CDS of all the GCC countries have all reached new 52-week lows, indicating renewed confidence in the region (refer to Figure 5 of Appendix).

¨   Economic Updates: Deflation hits Saudi Arabia in Jan-17, the first time in ten years, as the CPI declined 0.4% YoY (Dec-16: +1.7% YoY) and -0.2% MoM (Dec-16: -0.5% MoM). The decline in prices were mainly due to low oil prices, which led to retailers slashing prices, a reduction in government export revenues and forced fiscal haircuts. Nevertheless, we believe that the deflation will be short-lived as pressure for prices are on the rise with the introduction of a 50% tax on soft drinks and a 100% levy on tobacco and energy drinks in 2Q17. Plans of a 5% value added tax (VAT) in 1Q18 should also support prices. In addition to this, the government plans for another round of increases in fuel price by mid-2017.

¨   USD Sukuk Market: Hong Kong issued their third sukuk GBHK 3.132% 2/27 priced at 68bps+UST, with a BTC of c.1.7x versus 2x in their previous sukuk issued in May-15. Asia was allocated 57%, Middle East with 25% and 18% for Europe. By investor type, banks received 53%, fund managers at 3%, SSA at 11% and private banks and insurers at 1%. Slightly weaker BTC was likely due to some concern with the upcoming Chief Executive election on 26^th Mar 2017. Hong Kong also revealed its budget this week, announcing a budget surplus of HKD92.8bn for 2016-17 mainly contributed by land sales and stamp revenue. Financial Secretary Paul Chan also announced the GDP grew by 1.9% in 2016 in spite of the 3.1% growth recorded in 4Q16. It is estimated that 2017 GDP growth will be around 2 to 3%. Separately, Qatar Islamic Bank (QIB) Assembly General Meeting has just approved for a sukuk issuance to raise its limit of the perpetual Sukuk “Additional Tier 1 Capital (AT1) Sukuk” from QAR5bn to QAR7.5bn – it was not clear whether it would be issued in USD.