The Debt Management Office (DMO) of the Saudi Ministry of Finance continued its domestic Saudi riyal-denominated Sukuk issuance in November 2019 with its latest offering of a SR1.415 billion (US$380 million) Sukuk.
This latest foray into the market is the eleventh consecutive monthly domestic Sukuk issued by the DMO in 2019, bringing the total domestic sovereign Sukuk issued from January to November 2019 to SR64.74 billion (US$17.26 billion), making the Kingdom by far the most proactive sovereign issuer of domestic Sukuk.
Only a few weeks ago on 23 October, Saudi Arabia returned to the international Sukuk market with its third US dollar Sukuk offering – a 10-year US$2.5 billion Sukuk issuance, which matures in October 2029, priced at a coupon rate of 2.969% per annum paid bi-annually, which is equivalent to a profit rate of 127 basis points over MS (mid-swaps). Prior to that the DMO issued a US$2 billion Sukuk in the international market in September 2018 which was similarly priced at a final spread of MS plus 127 basis points, which is equivalent to a yield of 4.3 per cent per annum.
The Kingdom’s debut international Sukuk issuance in April 2017 totalled US$9 billion with two tranches – a 5-year US$4.5 billion tranche priced at a profit rate of 2.894% per annum; and a 10-year US$4.5 billion tranche carried a profit rate of 3.628% per annum.
This buoyancy in the Saudi Sukuk market is partly driven by the market expectation and sentiments following the launch in November of the state-owned oil giant Saudi Aramco’s plan to sell a 1.5% stake, or about 3 billion shares, at an indicative price of 30-32 Saudi riyals. The IPO is valued at SR96 billion riyals (US$25.6 billion), which gives Saudi Aramco a market value of US$1.6-US$1.7 trillion.
Under the partial sell-off, at least one-third of the sale is aimed at retail investors, and according to the lead manager Samba Capital this portion is oversubscribed with orders reaching in excess of SR38.1 billion (US$10.2 billion).
However, this has to be taken in the context of potential US-China trade tensions following the signing by US President Donald Trump of the Law on Hong Kong Trade to the chagrin of China. This has already had some dampening effect on crude oil prices which inevitably has a knock-on effect on the Saudi budget deficit and the economy. Brent crude oil futures on 29 November were trading at 2.4% down at US$62.57 per barrel.
As such, another factor that is driving Saudi Arabian government bond and Sukuk issuance is that the Kingdom is now expected to take longer than the projected 2023 to balance its budget, which means that the DMO, according to local bankers, will access more financing from the domestic and international markets from bond/Sukuk issuances.
In his pre-2020 budget statement on 31 October 2019 prior to the US-China issue over Hong Kong, Mohammed Al-Jadaan, Saudi Minister of Finance, projected that total expenditure in 2019 is expected to reach SR1,048 billion, as the government aims to achieve fiscal discipline and stability as key objectives for sustainable economic growth over the medium term. Revenues for the current fiscal year 2019 are expected to reach SR917 billion. The budget deficit is expected to continue to decrease in this fiscal year 2019, reaching 4.7% of GDP, compared to 5.9% last year. Similarly, expenditure is projected to reach SR1,020 billion in 2020, and revenues are about SR833 billion in 2020, while the budget deficit is projected to reach about 6.5% of GDP.
The demand dynamics of the Saudi Sukuk market is highlighted by strong and sustainable investor interest. The US$2.56 billion Sukuk in October, for instance, was oversubscribed 5 times. Similarly, the domestic Sukuk issuances have also seen strong uptake from local institutional investors, including the SR7.265 billion domestic issue in October 2019.
This latest SR1.415 billion Sukuk issuance in November 2019, which came under the unlimited Saudi Arabian Government SR-denominated Sukuk Programme, comprised three tranches:
- i) A 6-year first tranche of SR1.285 billion (US$340.00 million), with a total orderbook of SR 2.415 billion (US$640 million).
- ii) A 9-year second tranche of SR50 million (US$13.33 million), with a total orderbook of SR 2.678 billion (US$710 million), and
iii) An 11-year third tranche of SR80 million (US$21.33 million), with a total orderbook of SR11.091 billion (US$2.96 billion).
Saudi domestic issuances have also pioneered and increasingly featured longer term tenors of up to 30 years. The October domestic issuance, for instance had a 30-Year fourth tranche of SR5.119 billion (US$1.36 billion) attracting an oversubscribed order book of SR20.615 billion (US$5.50 billion). It seems that domestic Saudi institutional investors in Sukuk prefer longer tenor issuances, with the increasing opportunity of secondary market trading on the Saudi Stock Exchange (Tadawul) domestic trading platform.
However, according to the DMO, the joining of Tadawul to several global emerging markets indices “is expected to reap many economic and financial benefits, including increasing the efficiency and depth of the financial market, increasing the role of institutional investment, as well as improving the market liquidity through the flow of foreign investments, which has seen significant growth during the first half of this year compared to the same period last year.”