CIMB Daily Fixed Income Commentary - 03 May 2016

Market Roundup

• On Monday, US Treasury yields edged lower on the back of weaker oil prices and weak ISM manufacturing reading, but eventually moved and closed higher driven by gains in the stock market. The DJIA closed at 0.66% higher at 17,891 whilst short tenor UST rose 1-2bps and longer securities rose 4-5bps. The coming week we expect UST to be supported but prone to bouts of profit taking pressure ahead of the Apr NFP. The 10T support remains at 1.80%, followed by 1.75%. Consensus expectation for the non-farm payrolls is rise of 200k against +215k in Mar.
• Malaysian sovereign bond market consolidated with thinner flows of RM3.8 billion last Friday ahead of the long weekend, compared to RM5.1 billion a day prior. As we expect MGS yield movement to be rangebound this week, we continue to rely on receiving side in the swap market. We still see potential for 0-5bps decline in the 5-year IRS in the short term period.
• Thai government bonds were thinly traded, with daily volume totalling Bt10 billion registered ahead of the long weekend. This week we expect cautious trading ahead of MPC meeting. Resistance on the 10-year govvies remain 1.83%, a break above brings next resistance at 1.91% and 1.97%. In economic data release, the trade balance fell to $4,678 million in Mar from $5,978 million in Feb, mainly dragged by the surprise dip in exports of 1% (against consensus increase of 6.2%). Meantime, inflation was higher-than-expected at +0.07% for the month of Apr, against forecast -0.11%. We think this may increase the possibility for the BoT to maintain its policy stance unchanged in the upcoming 11 May MPC meeting and continues to await further development before opting for an easing move.
• Indonesian government bond market was very quiet on a shortened week as other regional countries were on holiday. Market was directionless for most of the day until S&P’s meeting with the government on next month outlook. Market strengthened with price rose by 25-50 cents on 10- and 15-year benchmark bonds. April CPI data also came out, down to -0.45% mom, lower than -0.28% expected. Volume was only IDR5.8 trillion and dominated by papers maturing in over 10 years (62%).

Weekly FX Update, 3 May 2016

v  The surprise move of both BoJ and RBNZ to hold their monetary policy unchanged leads to some sharp swings in the forex markets v  Euro strengthens on the back of positive data flows v  JPY strengthens by 5.0% after BoJ surprises the market by holding off on expanding monetary stimulus v  RM down slightly against the USD as local equity plunges and Malaysia 5Y CDS increases
Central banks have been in the centre focus over the week, with the Federal Reserves, the Bank of Japan (BoJ) and the Reserve Bank of New Zealand (RBNZ) all announcing their monetary policy during the week. The surprised move of both BoJ and RBNZ to hold their monetary policy unchanged has led to some sharp swings in the forex markets as market players have priced in for some sort of actions. Although the Fed as widely expected, left interest rates unchanged, there has been a subtle hawkish shift in the FOMC statement. The FOMC dropped its reference to global economic and financial developments posing risks, but it noted domestic growth had slowed. Besides the surprises from both BoJ and RBNZ, the weaker-than-expected US economy growth also weighed on the US dollar index. US advanced Q1 GDP rose only 0.5% saar, the slowest pace in two year, as businesses slashed investment by the steepest amount since Great Recession. Euro strengthened against the US dollar as deteriorated risk sentiment fuelled the demand for haven currency. The surprised move of central banks to stand pat on monetary policy, the weaker-than-expected quarterly earnings which resulted in the selling pressure on US equities and the soft US economic growth has weakened the sentiment in the currency market. Positive data flows also helped to support the euro as well.  The Eurozone M3 rose 5.0% in March, up from a revised 4.9% in February, suggesting a gradual recovery in the credit cycle is continuing. Meanwhile, the consumer confidence and the labour market in Germany also showed gradual improvement in the latest reading. The flash estimate for Eurozone GDP which showed the currency bloc economy growing solidly and the drop in unemployment rate also helped to support the euro. Japanese yen strengthened by 5.0% after Bank of Japan surprised the market by holding off on expanding monetary stimulus as policy makers opted to take more time to access the impact of negative interest rates. The yen soared around 2.6% after the announcement of the policy as market players forecasted a policy move. The Nikkei QUICK survey showed that around 60% market participants were expecting for additional easing. At the same time, BoJ also postponed their time frame for reaching the 2% inflation target to sometime in fiscal year 2017. It was the fourth delay in about a year. However, BoJ is providing extra support for financing disaster recovery efforts on the earthquake-stricken southern island Kyushu by introducing a JPY300 billion lending facility with 0% interest. Asian currencies with an exception to Philippine peso and Ringgit Malaysia were strengthened marginally against the greenback as strong Japanese yen helped to lift currencies across the region. Leading the gain were Singapore dollar, Thai baht and China renminbi. Fed’s statement which did not show clear view on the June interest-rate hike helped to support the Singapore dollar despite the inflation rate which registered the weakest reading since 1986. Thai baht, on the other hand, strengthened against the greenback on stronger-than-expected March factory output data. In China, the state planner, National Development and Reform Commission (NDRC), announced a 10-point plan to promote consumption and boost economy, also helped to support the China renminbi.   Ringgit Malaysia down slightly against the US dollar due the plunge in local equity and the increase in Malaysia 5-year credit default swap (CDS) rate. The KLCI Index plunged sharply, to close below the 1,700 level and settle at 1,672.72 following the selloff in equity markets across the region. Malaysia 5-year CDS rate broke the 50-day moving average of 161.6 to close at 165.5, 10 points higher than 155.7 a week ago. At the same time, the Prime Minister Office announced the appointment of Datuk Muhammad Ibrahim as the Governor of Bank Negara Malaysia (BNM) for a term of 5 years, starting on 1st of May 2016. Muhammad Ibrahim has been Deputy Governor of BNM since 2010 and a member of the monetary policy committee.
Market Movers for the Week v  From US: ISM Manufacturing PMI (Apr), ADP Employment Change (Apr), Trade Balance (Apr), ISM Non-manufacturing PMI (Apr), Non-Farm Payrolls (Apr), Unemployment Rate (Apr), Fed Engagement Speeches. v  From Eurozone: Eurozone Markit Manufacturing PMI Final (Apr), Eurozone PPI (Mar), Eurozone Retail Sales (Mar), ECB Non-Monetary Policy Meeting, ECB Economic Bulletin, Germany Asian Development Bank Annual Meeting, UK Local Elections. v  From Asia: PMI for Apr (China, Korea, Taiwan, Indonesia, Singapore, Malaysia), China Balance of Trade (Apr), Korea Inflation Rate (Apr), Taiwan Inflation Rate (Apr), Thailand Inflation Rate (Apr), Thailand Consumer Confidence (Apr), Indonesia Inflation Rate (Apr), Indonesia Consumer Confidence (Apr), Malaysia Balance of Trade (Mar). v  Public Holiday: Malaysia, China, Singapore, Hong Kong – Labour Day Holiday (Monday), UK – Early May Bank Holiday (Monday), Japan – Constitution Memorial Day (Tuesday), Japan – Greenery Day (Wednesday), Japan – Children’s Day (Thursday), Germany & France – Ascension Day (Thursday).
INDICATIVE MAJOR CURRENCIES Last Close 8.25 am Snapshot Expected Ranges for Today Bid Offer Low High USD/MYR 3.9160 3.8940 3.9300 3.8920 3.9370 JPY/MYR 3.6791 3.6710 3.7080 3.6600 3.7300 SGD/MYR 2.9191 2.9040 2.9390 2.9000 2.9600 EUR/MYR 4.5128 4.4950 4.5320 4.4700 4.5600 AUD/MYR 2.9981 2.9860 3.0220 2.9700 3.0400 GBP/MYR 5.7475 5.7200 5.7590 5.6900 5.8100 USD/JPY 106.44 105.86 106.27 105.46 106.46 EUR/USD 1.1524 1.1380 1.1690 1.1480 1.1590 AUD/USD 0.7656 0.7520 0.7830 0.7630 0.7730 Source: Bloomberg, AmBank

RAM Ratings reaffirms AAA rating of SI Capital’s Islamic debt issue

Published on 03 May 2016

RAM Ratings has reaffirmed the AAA/Stable rating of SI Capital Sdn Bhd’s (SI Capital or the Company) RM167 million Bai’ Bithaman Ajil Islamic Debt Securities (2004/2017) (BaIDS).

The reaffirmation reflects the strength of agreements which govern concession payments from the Sarawak State Government (the State) to SI Capital. The Company is entitled to a stream of predictable cashflows under 3 favourable agreements – the Concession Agreement, Lease Agreements and the Redeemable Preference Shares Subscription Agreement. The tight structural features and restrictive covenants of the financing facility limit potential cashflow leakage.

Payments from the State under the respective agreements have been mostly on schedule and are expected to remain so for the remaining tenure of the BaIDS. These payments are not subject to any dispute or deduction and will be forthcoming even in the event of non-performance by SI Capital. Going forward, the Company’s finance service coverage ratio is anticipated to stay above 2 times – well above the 1.25 times stipulated as a covenant.

Given its minimal performance obligations under the said agreements, SI Capital faces a low level of operational risk. The Company’s exposure to counterparty risk is also minimal as the ultimate obligor of concession payments is the State. Sarawak’s strong fundamentals are underpinned by the State’s strong financial performance, the availability of natural resources and large-scale projects in the pipeline as well as the supportive relationship it shares with the Federal Government. However, these factors are balanced by Sarawak’s sizeable debt burden, its overdependence on commodity-based revenue and the State’s lagging overall development.

A special-purpose funding vehicle, SI Capital is indirectly owned by Sarawak Incorporated Sdn Bhd, a wholly owned subsidiary of the State Financial Secretary of Sarawak. In return for constructing and maintaining government office complexes and residential quarters in Kapit, Mukah and Betong, the Company will receive annuity payments of RM17.02 million over 15 years. Meanwhile, SI Capital had entered into two 15-years Lease Agreements with the State for the rental of Menara Pelita and 46 strata-titled units in Wisma Pelita Tunku.

Media contact

Kathleen Por

(603) 7628 1015

kathleen@ram.com.my