RHB: Weak Oil Prices May Impact Sukuk Issuance in GCC and Malaysia

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.