Sukuk issuances in August 2015 stood at USD450mn, declining from USD2.3bn registered in the earlier month.

For YTD August 2015 sukuk issuance by value declined 28% y-o-y to USD13.0bn, mainly driven by a sharp decline in corporate issuances (-11% y-o-y, worth USD8.2bn), sovereign (-24% y-o-y, USD3.8bn) and quasi sovereign issuances (-73% y-o-y, USD1.0bn). Corporates comprised 63% of the total issuance value for YTDAugust 2015, followed by sovereign at 29% and quasi-sovereign issuances at 8%.

Bahrain was the largest issuer of sukuk by number of issuances (19) in GCC for YTD August 2015, followed by UAE (6), Saudi Arabia (9) and Qatar (1)  Saudi Arabia accounted for the largest share of sukuk issued by value among GCC countries, with nine issuances totaling USD4.95bn for YTD August 2015, followed by UAE (six issuances; worth USD4.7bn), Bahrain (nineteen issuances; worth USD2.8bn) and Qatar (one issuance; worth USD0.55bn)

Kuwait fiscal deficit stood at KWD2.7bn

For the first time in the history of Kuwait, the country faced a huge deficit of KWD2.7bn in FY2014. If the prolong weakness in oil prices continues, Kuwait will face a larger deficit this year. The current year’s budget has been formed based on Kuwait’s crude oil price at USD45/bbl; but the price of crude oil has to be close to USD70/bblto avoid any shortage in the budget.

Oman’s Islamic banking sector records robust growth during the first half of 2015

Helped by growing awareness of Sharia-compliant banking services and increasing number of branches, the Islamic banking sector in the sultanate recorded robust growth in 1H2015. According to the statistics from the Central Bank of Oman, the combined assets of the sector surged 64% to OMR1.83bn as on June 30, 2015 against OMR1.11bn a year ago. Islamic banking accounted for 6.3% of the total banking assets in Oman, compared to 5.3%in 2014and 3.6%in 2013.Totalfinancing by Islamic banks and windows jumped 85% to OMR1.38bn from OMR745mn.

Saudi bank NCB raises SAR2bn through capital boosting sukuk National Commercial Bank (NCB)

Saudi Arabia’s largest lender, is raising SAR2bn (USD533.3mn) through a Basel III complaint Tier 1 perpetual sukuk. The transaction will be privately placed with one or more government-owned investment funds. This is the third such sukuk issuance by NCB since June 2015, which plans on raising as much as SAR7bn of capital before the end of 2015.

Prolong drop in oil prices might lead to GCC credit risk re-pricing

International bonds from the Gulf’s wealthy energy-exporting countries, which have always outperformed emerging market debts, might loose their safe-haven status, if oil prices continue to drop. Unlike most of the world, GCC governments have enjoyed big budget surpluses, their currency pegs to the U.S. dollar have protected them from currency devaluation.

Saudi’s Almarai to issue SAR2bn through sukuk

Saudi Arabian dairy producer, Almarai plans to make a senior sukuk issuance worth SAR2bn (USD533mn) to meet its upcoming investment needs. HSBC, Saudi Arabia and Samba Capital and Investment Management Co are acting as joint lead managers to the deal.

Saudi fiscal deficit to widen in 2015

Saudi Arabia faces a risk of rising fiscal deficit amid the plunging oil prices, declining reserves and an increase in military spending. The International Monetary Fund forecasts a budget deficit of USD150bn for Saudi Arabia in 2015, which is around 20% of the total economic output in 2015 due to government’s strong spending despite reducing oil revenues. The Economist Intelligence Unit (EIU), however, expects the fiscal deficit to reach 13.3% of GDP (its largest shortfall since 1987)inflated by the rising costs of the Saudi-led air campaign in Yemen.

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GCC Market Update August 2015

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

Sukuk Yields Tighten on Dollar Weakness

Dollar Sukuk weakened 0.22%-0.43%; yield tightened 6bps. The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) inched lower by 0.22% over the week to close at 101.59 (week prior: +0.12% to 101.81), with weighted average yield widening 5.9bps to 2.343% (week prior: -0.6bps to 2.284%). While the Dow Jones Sukuk Total Return Index (DJSUKTXR) retracted 0.43% to stand at 154.8 (week prior: -0.01% to 155.47). Underperformers were FGBUH 8/16, MALAYS 21-25, RAKS 3/25 and ISDB 1/17, market value loss by USD19.4m.

Return Indices (DJSUKTXR vs BMSXMTR)

Credit Protections Rise on Weak Oil

Credit protections rose as oil suffered another week of losses. CDS spreads for Saudi Arabia hit a 38-month record high of 115bps (+51.2bps) despite oil exports rebounded by 6.2% MoM to 7.37m bbl/day in June-15, while its sovereign sukuk such as SECO 22-24 surprised to the upside at higher market value of USD7.08m over the week.

Similarly, Qatar CDS spreads rose 20.4bps to 74bps yet more buyers were seen for QATAR 18-23 (+USD2.54 in market value). We saw Malaysia’s CDS spreads widened by 14bps to 181.98bps on W-o-W in light of the weaker FDI data (-41.8% YoY), rising inflation (+3.3% in July), declining reserves and constant noises on the political front.

Weak Oil Prices May Impact Sukuk Issuance in GCC and Malaysia

Oil prices fell as production continue to climb. Brent oil trades at 6-year lows of 46.62/bbl (-5.3% W-o-W) while WTI fell 2.6% to 43.32/bbl. Total oil production continues a steady upward climb since mid-June 14, even the oil prices have fallen by more than 50% (refer to Chart of the Week). Oil prices remain under pressure in the face of global supply glut, slowing global economic growth and stronger dollar. In turn, this uncertainty could limit the sukuk issuance in core markets such as GCC countries and Malaysia.

The cost of issuing a two year Turkish sovereign sukuk has jumped 2.16% since February of this year as concerns about the health of the Turkish economy and its currency push up borrowing costs.

The Treasury of the Republic of Turkey issued a two year Sukuk for 1.5 billion Turkish Lira this week at an annual profit rate of 9.96% (payment split in two to be paid twice a year). Compared with a similar issuance in February the Turkish Treasury was able to raise a slightly larger amount of 1.8 Billion for the same two year maturity period at a profit rate of 7.8%.

Turkish Sukuk Borrowing Rate Jumps

The Turkish Lira has been suffering losses against a surging US Dollar while Borsa Istanbul’s BIST-100 index was at its lowest level at the close of the daily session on Friday. The benchmark index decreased by 884.07 points to close at 73,797.77.

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

Indices ended mixed on lack of fresh leads; yields flat at 2.28%.

The Bloomberg Malaysia Sukuk Ex-MYR Total Return (BMSXMTR) added +0.12% W-o-W to 101.81 (week prior: +0.04% to 101.69), with average yields tightening -0.6bps to 2.284% (week prior: +2.1bps to 2.290%). Gainers were led by QATAR 1/23, QATAR 1/18, SECO 4/24, ISDB 9/19, and ISDB 3/19 gaining USD18.m in value; while underperformers included ISDB 10/18, ISDB 9/19, SECO 4/22, LBSUK 10/19, and GBHK 9/19 shaving USD17.2m in value. On the contrary, the Dow Jones Sukuk Total Return Index (DJSUKTXR) retracted marginally by -0.01% to 155.47 (week prior: +0.05% to 155.49), YTD returns flat at 1.95%.

Flows seen into safer sovereign-backed sukuk.

QATAR 18-23 and ISDB 15-20 topped gainers, tightening 8-19bps to 1.30%-1.70% and 3-17bps to 1.36%-1.83%, respectively, in yields. We also saw attempts to diversify with buying into GBHK 20 (-5bps to 1.95%) and GBP-denominated UKSUK 19 (-5bps to 1.95%); while ADIBUH Pc10/18 (-11bps to 4.65%) were taken up for cushy yields. On the other end, markets cashed out on DAMAC 19 (+38bps to 6.55%) ending its three-week top gainer streak. Also, better sellers were seen for Indonesian government INDOIS complex 18-23 (widening 4-11bps to 2.61%-4.23%) and corporate GARUDA 20 (+12bps to 5.98%) after weaker foreign reserve and GDP data last week; and some FIs like ADIBUH 15, TUFIKA 19, and FGBUH 16 (+6-21bps to 0.67%-4.07%).

Risk for high-quality IG narrowed.

CDS spreads narrowed for Gulf safe-markets like Qatar (-6.4bps to 53.6), Saudi Arabia (-3.2bps to 63.8), Abu Dhabi (-2.7bps to 53.9) – after S&P affirms ratings – and Bahrain (-3.4bps to 277) as it releases and tries opposition leader and lifts ban on pro-opposition newspaper. Turkey CDS rose to 16-month highs of 257 (+11.2bps) despite stronger IP and firm current account data. Similarly, Indonesia and Malaysia’s CDS rose to 17-month and 23-month highs of 207 and 172 after weaker foreign reserves, before retracing to 201 (ahead of better than expected current account deficit) and 168 (after firmer 2Q GDP and current account surplus), respectively.

Quarterly USD Sukuk Supply (as at 14-Aug-2015)

The Sukuk market appears to be waking up after a slow return to activity following Ramadan.

The following domestic currency Sukuk have been issued over past few days, and have been added to the Sukuk database: Kuveyt Turk 2016, Brunei Darussalam January 2016 and National Shipping Company of Saudi Arabia (Bahri) 2022.

Also see the Sukuk weekly catch-up on IslamicFinance.com where RHB discuss the market ending up last week. Interesting to see fuel subsidies on gasoline and diesel to be abolished by 24% and 29% respectively effective 3rd August in UAE as it attempts to fill a 50% plunge in government revenue due to the falling oil price.

The Kyrgyz government approved the project on introduction of Sukuk, State Secretary Abduhalik Shamshiyev said at the board meeting of the State Service for Financial Market Regulation and Supervision.

Kyrgyzstan, is located in Central Asia and Islam is the dominant religion with 80% of the population being Muslim.

International law firm Simmons & Simmons and the Kyrgyz Republic signed an agreement in May 2014 to provide consultancy services for the development of laws and regulations, supporting the introduction of Takaful (Islamic insurance) and Sukuk (Islamic securities) in the Kyrgyz Republic. The consultancy services to be provided by Simmons & Simmons were funded under a technical assistance grant provided by the Islamic Development Bank (IDB). The former Soviet republic expects to expand Islamic finance to help attract foreign investment, Tayirbek Sarpashev, First Vice Prime Minister of the Kyrgyz Republic, said in a statement at the time.

Kyrgyzstan’s per capita gross domestic product is about $1,300, or just a tenth of that in oil-rich neighbour Kazakhstan.

Commentary by RHB Global Sukuk Markets Research, Kuala Lumpur, Malaysia
Dovish FOMC and delayed Iran deal supported gains. Sukuk tracked the UST curve bull flattener of 4-7bps over the week mainly attributed to the dovish FOMC minutes released Thursday morning and wider fiscal deficit. Additionally, sanctions relief on Iran seemed less likely to fall within this year after its nuclear discussions stayed inconclusive past Thursday’s deadline. The Shanghai Composite Index ended the week with 2 days of recovery (c.4.7%-5.0%) as China’s support measures kicked in. Over the weekend, Greece is given until Wednesday for its parliament to approve the reforms before third bailout can be considered.

Sukuk Gains
Sukuk gained 0.18%-0.26%; yields tightened 4bps. The Bloomberg Malaysia Sukuk Ex-MYR Total Return Index (BMSXMTR) ended the week 0.18% higher at 101.5 (week prior: -0.05% to 101.3). The seemingly higher Beta Dow Jones Sukuk Total Return Index (DJSUKTXR) resonated with 0.26% WoW gain to 155.1 (week prior: -0.18% to 154.7), pulling YTD returns up by 26bps to 1.72% (week prior: -18bps to 1.46%). Meanwhile the weighted average yield on the BMSXMTR tightened 3.8bps to 2.277% (reversing last week’s 3.8bps widening to 2.315%). Top 5 performers in the BMSXMTR were short to mid dated IG names like QATAR 1/23, SECO 4/22, SECO 4/24, GBHK 6/20, and ISDB 3/19 gaining USD30.7m in value (week prior: loss of USD33m).

The International Islamic Liquidity Management Corporation (IILM) issued a short-term sukuk, whilst the Central Bank of Bahrain surprised the market with a long term 10-year issuance.

Regulars Return to Market

The International Islamic Liquidity Management Corporation (IILM) returned to the market this week with an $860 million issuance. The Malaysia based IILM sells its short term sukuk by means of auctions through its primary dealers with this weeks auction being well received attracting orders of USD1.743 Billion from 11 orders,

The Central Bank of Bahrain (CBB) which tends to issue short term sukuk surprised the market with a long term 10 year local currency issuance for BHD 200 million (around US $530 million) at a profit rate of 5%. The CBB is looking to build a longer term yield curve and earlier this year issued a BHD 100 million 3 year issuance at a profit rate of 3%, whilst its short term issuances tend to be offered at profit rates of 0.75% to 1%.

APICORP Sukuk Programme

Saudi major Arab Petroleum Investments Corporation (“APICORP”) announced a US $3.0 billion Sukuk issuance programme which Moody’s investor service assigned a provisional Aa3 stable rating. The issuance will be through the Cayman Islands SPV APICORP Sukuk Limited.

The programme will use a hybrid structure with the proceeds to be used by the Issuer to acquire a portfolio of assets comprised of no more than 49 percent in intangible assets and/or Shari’a-compliant commodities and no less than 51 percent in Ijara assets, sukuk, and/or other tangible assets.