Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia

Dwindling Expectations for Fed Rate Hike Continues to Drive Support

The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) and Dow Jones Sukuk Total Return (DJSUKTXR) indices gained 0.30% to end at 101.9 and 155.1 respectively, with weighted average yields declining 5.5bps to 2.66%.The gains were led by government and government-related entities such as SECO ’22-24, Qatar ’23 and ISDB ’20 as investors flocked to safety following global stock selloffs which intensified and more dovish comments from Fed Chair Janet Yellen.

There is now less than 50% chances of Fed hike this year, based on Bloomberg consensus. On the other hand, Brent prices surged 12.3% last Friday on hopes of an OPEC production cut after the Wall Street Journal reported UAE’s energy minister as saying OPEC members were ready to cooperate on possible production cuts. Nevertheless, oil prices still suffered a weekly loss of 2.1% to USD33.4/bbl.

CDS Spreads Widen

CDS spreads widened for Bahrain, Saudi Arabia, Turkey, Malaysia and Indonesia (Figure 5). Cost of insuring against a Bahrain, Saudi Arabia and Turkey 5y sovereign debt default widened 6.7bps- 4.9bps to 194bps-399.5bps. Correspondingly, Malaysia’s CDS spreads widened 9bps to 194bps, dampened by a weaker pace in industrial output growth (4Q15: 2.9% YoY; 3Q15: 4.5% YoY) that envisaged a slower real GDP growth for a similar period (4Q15: 4.4% YoY), based on our economists.

The Indonesian government has recently made progress in spurring investment inflows through relaxed foreign investment restrictions in various sectors, with its sovereign 5y Indonesia CDS trading in the 253bps area (+6.2bps).

Malaysian Issuances

In the MYR space, UMW Holdings printed MYR200m (AAA) 3y and 5y tranches at 4.5% and 4.7% respectively, for refinancing purposes. On the ratings front, MARC assigned AA-IS preliminary rating with a negative outlook to Sime Darby’s MYR3bn perpetual subordinated sukuk programme. The negative outlook reflects slower-than-expected pace of de-gearing after substantially debt-funded acquisition of New Britain Palm oil Limited in Mar-15 coupled with a weaker earnings and cash flow generation.

USD Sukuk Supply (as at 12-Feb-2016)

Sukuk Pipeline