IslamicFinance.de

S&P Global Ratings may not be ready to upgrade Indonesia’s credit rating from junk, concerned by rising bad debts and risks to the growth outlook. Indonesia failed in June to win an upgrade from S&P, which rates the nation’s debt at BB+ with a positive outlook. S&P said at the time that while the country’s fiscal framework had improved, it still faced challenges on its budget performance. Josua Pardede, an economist at PT Bank Permata in Jakarta, said Indonesia still faces fiscal risks. He estimated the tax shortfall for this year will be more than 200 trillion rupiah ($15 billion), causing the budget deficit to widen to around 2.7% of gross domestic product. The government has a deficit cap of 3% of GDP. The ratings company will meet with Indonesian Finance Minister Sri Mulyani Indrawati within the next few weeks before it makes its next assessment due in December. S&P is the last of the three main credit-rating companies to keep Indonesia on junk status.

Oil’s rally from a 12-year low has gone far enough to revive demand for Islamic bonds, but not so far that frequent issuers aren’t still in need of funds. Stimulus efforts in oil-producing nations helped drive sales of Islamic bonds up 34% to $37.5 billion in 2016, after dropping to a five-year low in 2015. A two-year slump in energy markets has compelled governments in Malaysia and the Middle East to boost debt sales to finance projects built in partnership with private companies. S&P Global Ratings estimates that weak energy prices will leave Gulf Cooperation Council countries with $560 billion of funding needs from 2015 through 2019. According to Apostolos Bantis, head of credit research at Commerzbank AG in Dubai, GCC sukuk activity will rise next year and there will be some first-time issuers.

Abu Dhabi Islamic Bank has cut more than 200 jobs over the past three months. The cuts were made mostly in the retail business and about 100 people were dismissed last month. Abu Dhabi Islamic Bank joins other lenders in the U.A.E. that have cut jobs to adjust to slower economic growth after oil prices halved over the past two years. Union National Bank dismissed about 50 people in August, while Emirates NBD, the nation’s biggest bank, reduced its workforce by more than 250 people at its small and medium enterprise and Islamic lending businesses in April.

Malaysia’s stock exchange operator is discussing a tie-up with Indonesia’s bourse and plans further alliances to mobilize funds targeting the world’s almost $12 trillion in Shariah-compliant equities.

Bursa Malaysia Bhd. is in talks with the Indonesia Stock Exchange to explore various forms of cooperation such as allowing cross listings and hopes to start collaborating by mid-2017, Jamaluddin Nor Mohamad, Bursa’s Islamic capital market director said in an interview in Kuala Lumpur. Bursa plans to forge partnerships with exchanges in Asia and the Middle East to develop the Islamic capital market, he said.
Malaysia already tightened compliance rules for Shariah stocks in 2013 as it sought to draw overseas funds who have a stricter view on permitted investments. Shariah law forbids investments in shares of companies involved in activities considered unethical such as gambling, prostitution, alcohol and pork-related businesses.
Some 669 stocks, or 74 % of the total shares listed on Bursa Malaysia, comply with Shariah principles, according to the Securities Commission. The market regulator reviews the list twice a year based on the companies’ audited financial statements.

Khazanah Nasional, the Malaysian sovereign fund, is considering selling as much as $500 million of exchangeable sukuk. The state-owned firm is currently choosing banks for the potential offering. Khazanah has been reducing stakes in listed Malaysian companies through Islamic debt offerings that can be converted into shares. The fund last sold $500 million sukuk that can be exchanged into shares of Tenaga Nasional, the country’s biggest power producer, in 2014. It is also the largest shareholder of IHH Healthcare, Asia’s biggest hospital operator. Sales of Islamic bonds in Malaysia surged 60% this year to 45.8 billion ringgit ($11.4 billion), while offerings of global sukuk climbed 19% to $28.1 billion.

Khazanah Nasional, the $27 billion Malaysian sovereign fund, is weighing a bid for control of the insurance operations of billionaire Quek Leng Chan’s Hong Leong Financial Group. Khazanah is considering an offer for Hong Leong Financial’s 70% stake in Hong Leong Assurance and its 65% holding in Hong Leong MSIG Takaful. The bid could be valued at about 3.2 billion ringgit ($799 million). Hong Leong Financial said last month that Malaysia’s central bank had no objection to the sale of its stakes in the two insurance units.

Sarawak Hidro, the state-owned developer of Malaysia’s biggest hydropower project, plans to offer 5.5 billion ringgit ($1.3 billion) of sukuk without a government guarantee. The electricity generator is weaning off government guarantees to ease the nation’s fiscal burden. Sarawak Hidro’s plant on Borneo island is part of Prime Minister Najib Razak’s $444 billion development plan to become a developed economy by 2020. Malaysia aims to cut its ratio of debt to gross domestic product to 45% by 2020, from 54.5% at the end of last year.

The worst time for global markets may be the best time for Hong Kong’s government to carry out its planned third Islamic bond sale. Aberdeen Islamic Asset Management says the time is ripe for a sukuk. The yield on the city’s five-year Shariah-compliant bonds sold in September 2014 has fallen 32 basis points to 1.56% since February. Sales of dollar sukuk are at an all-time high for this time of year, suggesting there’s appetite for an issue by Hong Kong, rated AAA by S&P Global Ratings.

Turkey is issuing $1 billion dollar-denominated sukuk after a 18-month absence from the Islamic finance market. The government is offering five-year notes at 290 basis points above the midswap rate, aiming to sell debt before the Federal Reserve acts on its stated intention to increase interest rates. Turkey has already raised $3 billion in capital markets this year, completing two-thirds of its planned borrowing program for 2016. Turkish government debt is rated Baa3 at Moody’s Investors Service, the lowest investment grade.

#Malaysia’s state investment company 1MDB paid the coupon on its Islamic debt after missing two payments on other securities earlier. The company undertook the scheduled payment of 143.8 million ringgit ($34.9 million) on its 5 billion ringgit 5.75% notes due 2039. President Arul Kanda said 1MDB has ample liquidity to make interest payments and service its current debt obligations. 1MDB’s separate $1.75 billion of 5.99% notes due 2022, which are guaranteed by IPIC, rose 0.1 cent to 103.7.

The Indonesian government is considering cutting the levy to zero for all local-currency sovereign bonds from 15% for domestic investors and 20% for international ones. According to Abas A. Jalil, CEO of Amanah Capital Group, the zero tax will definitely encourage more participation by government funds in the Indonesian sukuk market. The proposal aims to revive Islamic banking after the industry shrank to 3.5% of total financial assets in March, from 5% a year earlier. Only one Indonesian company has issued rupiah sukuk in 2016 for the equivalent of $7.3 mn compared with $5.9 bn worth of ringgit sales in Malaysia, the biggest Shariah-compliant debt market.

The fates of 1MDB bonds are diverging this month: those guaranteed by Abu Dhabi’s sovereign wealth fund have rallied, while notes with support from Malaysia’s own government have dropped. 1MDB's 4.4% 2023 notes, backed by the government, slumped 6.4% in May, set for the worst slide in 16 months. The fund’s 5.99% 2022 bonds, backed by Abu Dhabi’s International Petroleum Investment gained 1.9%. The contrast reflects growing investor concern about the Malaysian government backing as Najib grapples with an economy forecast to expand at the slowest pace in seven years amid a collapse in oil prices.

Malaysia’s biggest pension fund is calling on the government to increase the supply of ringgit Islamic bonds as the manager of $170 bn starts a Shariah-compliant option for savers. The Employees Provident Fund (EPF) prepares to launch the Islamic plan with an initial 100 bn ringgit ($25 bn) in January. Currently the Shariah-compliant share of issuance is 42%. CEO Shahril Ridza Ridzuan said the government is actively looking at it. Boosting sales would help expand the range of maturities of the securities and their investor base. Overseas investors owned 19 bn ringgit of the government’s Islamic bonds in April, 8.2% of their total note holdings in the nation.

Gulf borrowers are back in the bond market, and a new pattern is emerging. GCC bond sales climbed 32% to a total $15.9 bn this year, according to data compiled by Bloomberg. Dubai’s government sold a $569 million privately-placed sukuk in March and Emirates NBD raised $499 mn from such deals. Bahrain and Oman have also opted to privately place sovereign issues. Rizwan Kanji, consultant at King & Spalding said most private-placement issuances are underwritten by the arrangers, which provides the issuer with certainty of execution and pricing.

#Dubai ports operator DP World has selected more than a dozen banks for its sale of Islamic bonds. Fifteen lenders have been hired for the offering of dollar-denominated, benchmark-sized securities whose maturity may be as long as seven years. Proceeds from the sale will be used for a tender offer for the company’s existing sukuk due in 2017.

Emirates Islamic Bank has mandated banks including HSBC for the sale of Islamic bonds. The sale of the dollar-denominated, benchmark-sized securities may begin this week and the sale is arranged by Standard Chartered, Emirates NBD, Dubai Islamic Bank, Noor Bank and Bank ABC. Emirates Islamic Bank last sold bonds in July 2012, when it raised $500 mn from securities with maturity of between five and six years.

Islamic banking is increasingly attracting global funds. Mark Mobius, executive chairman at Templeton Emerging Markets Group sees great potential in Islamic finance and emerging markets. Tepleton invested $1.2 bn in sukuk alone and plans to invest more. Emerging markets have been negative in the last 3 years, but are now growing rapidly. The trend is towards greater privatization, more fairness and more disclosure.

Badlisyah Abdul Ghani, president of Chartered Institute of Islamic Finance Professionals, says we need a megabank in every country. Today most jurisdicitons do not have effective infrastructure for Islamic finance, some banks are efficient in their own country, but not in other countries. Megabanks have to be multi-country players.

RHB Islamic International Asset Management is favoring the sovereign and corporate debt in maturities of 7 to 10 years. CEO Sharizad Jumaat said the company sees limited currency weakness in 2016 and expects the key central bank rate to remain unchanged. Sharizad said the ringgit will be quite stable within the weak environment of slower growth in China and Europe.

Mushtak Parker, research consultant at Islamic Finance, says millennials are the main drivers in Saudi Arabia and Oman. The biggest challenge of Islamic finance is public policy, that most Islamic countries do not have a recognized or stated public policy in Islamic finance. It is the responsibilty of the governments because nothing can happen in a market without government approval or facilitation.