Sustainability Marks Saudi Government Monthly Domestic Sukuk Issuance as Total Volume Rises to SAR49,328.5m (US$13,150.72m) in First Nine Months of 2020

The National Debt Management Center (NDMC) of the Saudi Ministry of Finance (MoF) continued with its monthly domestic sovereign Sukuk issuance in September 2020 as part of its public debt strategy. The NDMC issued its latest Sukuk raising SAR1,245 million (US$331.91 million) through the issuance of a two-tranche offering on 16 September.

This is the ninth consecutive monthly Sukuk issuance in 2020 to date. In August, the NDMC raised SAR500 million (US$133.31 million) through the issuance of a two-tranche Sukuk.

This latest Sukuk issuance in September 2020 comprised two tranches:  

i) A 4-year Tranche I totaling SAR130 million (US$34.66 million) maturing on 26 July 2024 and priced at a profit rate of 1.64% per annum and a yield of 1.5%. The auction attracted bids totaling SAR9,100 million (US$2,426.01 million).

ii) A 12-year Tranche II totaling SAR1,115 million (US$297.25 million) maturing on 26 July 2032 and priced at a profit rate of 2.89% per annum and a yield of 2.75%. The auction attracted bids totaling SAR7,615 million (US$2,030.12 million).

The Saudi NDMC has a multi-prong government-debt raising strategy comprising raising more funds from the financial markets including through increased domestic and international Sukuk issuances in addition to international conventional bonds and drawing on their sovereign wealth fund assets. The Kingdom is by far the single most proactive sovereign domestic Sukuk issuer.

All the Kingdom’s sovereign domestic Sukuk issuances come under the unlimited Saudi Arabian Government Saudi Riyal (SR) denominated Sukuk Issuance Programme established on 20 July 2017 by the Ministry but updated on 20 July 2020 “to issue and offer, at its discretion, Sukuk in multiple issuances to investors, pursuant to the Royal Decree approving the National Budget.” The Programme, structured and lead arranged by Alinma Bank, also comes as part of the NDMC’s role in securing Saudi Arabia’s debt financing needs with the best financing costs and would contribute to the development of the Saudi Sukuk and Islamic Capital Market.

According to the latest data from the MoF and the Saudi Arabian Monetary Agency (SAMA), COVID-19 has taken its toll on the Kingdom’s total outstanding direct indebtedness. This is true for almost every economy in the world. The UK for instance went into recession when its GDP contracted to -20.4% in Q2 2020 compared with -2.2% in Q1. COVID-19 related borrowing sent government debt to GBP2,004 billion in July 2020.

Saudi Arabia’s total outstanding direct indebtedness as at 30 June 2020, according to the MoF, amounted to SAR819.9 billion (US$218.6 billion), comprising SAR469.7 billion (US$125.3 billion) of domestic indebtedness and SAR350.2billion (US$ 93.4 billion) of external indebtedness.

In contrast, the Kingdom’s total outstanding direct indebtedness as at 30 December 2019 amounted to SAR677.9 billion (US$180.8 billion) or 22.8% of GDP and 33.5% of non-oil GDP, comprising SAR372.8 billion (US$99.4 billion) of domestic indebtedness and SAR305.2 billion (US$81.4 billion) of external indebtedness. This means that the debt burden increased by SAR142.00 billion (US$37.86 billion) in the first six months of 2020.

Given the persistence of COVID-19 with recurring spokes all over the world, debt will continue to feature in Saudi Arabia’s public finances as it will elsewhere. The NDMC’s 2020 Calendar of Local Sukuk Issuances envisages 12 consecutive monthly issuances of Saudi-riyal denominated sovereign Sukuk. No other jurisdiction is committed to such a dedicated domestic Sukuk issuance regime.

The Saudi sovereign domestic Sukuk issuance is also driven by the high volume of trading of Sukuk certificates in the secondary market on Tadawul (the Saudi Stock Exchange) and allowing these certificates holders to benefit from the Zakat redemption applied within the framework of the local currency Sukuk issuance programme.

Compiled from MoF data, the NDMC issued in the first nine months of 2020 consecutive monthly issuances under the Sukuk Issuance Programme totaling SAR49,328.5 million (US$13,150.72 million) with total bids amounting to SAR71,515.0 million (US$19,065 million).

The continued traction and upward growth trajectory of Saudi domestic Sukuk issuance, is driven by robust investor demand and the emergence of tenors of up to 40 years, which is underlined by the high investor oversubscription.

The Kingdom is feeling the health and economic impact of the COVID-19 pandemic which necessitated the introduction of a SR120 billion (US$31.91 billion) COVID-19 Mitigation Package, increasing VAT from 5% to 15%, and discontinuing a SAR1,000 per month allowance for public servants. This has been exacerbated by the sharp fall in crude oil prices and in the Kingdom’s oil production.

Fitch Ratings forecast Saudi Arabia’s general government debt as rising to 38% of GDP in 2020 and to 41% in 2021, while at the same time its sovereign net foreign assets declining from 78% of GDP to 68% in the same period. The Saudi economy is projected to contract by -6% in 2020 before bouncing back to +5.4% in 2021.

Saudi Sovereign Domestic Sukuk Issuance Jan-September 2020

Source: Compiled by Mushtak Parker from Data of the NDMC, Saudi Ministry of Finance   September 2020

Saudi Arabia is way ahead in tapping the domestic sovereign Sukuk market, given that it has a well-established issuance infrastructure complete with a government policy framework under its Fiscal Balance Programme and Financial Sector Development Programme, whose objectives inter alia is to add to a diversified public debt fund raising strategy and to the development of the Saudi Sukuk and Islamic Capital Market.