Saudi DMO Continues Sovereign Domestic Issuance with SR4.496bn Sukuk in February Amid Fast-Changing Global Economy due to Impact of Coronavirus and Falling Oil Prices

The Debt Management Office (DMO) of the Saudi Ministry of Finance (MoF) continued its proactive domestic sovereign Sukuk issuance in February 2020 when it issued its second offering – a two-tranche Sukuk totaling SR4.496 billion (US$1.2 billion).

The issuance comprised two tranches – a SR508 million (US$135.34 million) tranche with a 7-year tenor maturing in 2027; and a second tranche of SR3.988 billion (US$1.06 billion) with a tenor of 15-years maturing in 2035. The former was oversubscribed with the orderbook reaching SR1.223 billion (US$330 million).

This follows the DMO’s two-tranche SR6.72 billion (US$1.79 billion) domestic Sukuk offering in January 2020.

The issuance comes at a time when the global economy is faced with major disruptions due to the impact of the continuing outbreak of the coronavirus, which has now been designated as a pandemic by The World Health Organisation and whose epicentre has shifted from Wuhan, China to Italy and Europe.

Saudi Arabia and Russia, two of the largest crude oil exporters in the world, have increased production with the result that oil prices have plummeted, hovering between US$30 to US$40 per barrel. This alone, according to bankers in the Kingdom, would impact on Saudi Arabia’s revenues and ultimately its budget deficit. In the context of Sukuk issuance, this could mean the DMO raising more funds from the financial markets including through increased domestic and international Sukuk issuances in addition to international bonds and drawing down on its sovereign wealth fund assets.

However, given the initial shock regarding the above global and oil price dynamics, the immediate effect has been a dampening one.  In the first two months of 2020, for instance, the DMO has issued domestic sovereign Sukuk totaling SR11.216 billion (US$2.99 billion). This compared with SR16.471 billion (US$4.39 billion) for the first two months in 2019. This is a decrease of SR5.255 billion (US$1.4 billion).

The Kingdom’s stated Sukuk Issuance Strategy is in pursuit of its Vision 2030 policy, the 17 United Nations Sustainable Development Goals (SDGs) adopted in 2015 by the General Assembly as part of its Agenda 2030 as a “blueprint to achieve a better and more sustainable future for all,” and in line with the Ministry of Finance (MoF’s) Financial Sector Development Programme to enable financial institutions to support private sector growth and meet the objectives of Vision 2030. 

All the Kingdom’s sovereign domestic Sukuk issuances come under the unlimited Saudi Arabian Government Saudi Riyal (SR)-denominated Sukuk Programme, established on 20 July 2017 by the Ministry “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, according to the MoF, also comes as part of the DMO’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.

The DMO’s domestic sovereign Sukuk policy will continue to make the running in the MoF’s public debt strategy, according to Saudi banking sources. In 2019, the DMO issued twelve consecutive monthly domestic Sukuk, bringing the total domestic sovereign Sukuk issued from January to December 2019 to SR69.839 billion (US$18.61 billion), making the Kingdom by far the most proactive sovereign issuer of domestic Sukuk.

This is a staggering SR23.054 billion (US$6.15 billion) year-on-year increase on fiscal year 2018 when the DMO raised SR46.785 billion (US$12.47 billion) through regular monthly issuances for the year. If one adds the US$2.5 billion international Sukuk issued by the DMO last October, then the total US dollar equivalent of Saudi sovereign Sukuk issued in 2019 amounts to an impressive US$21.11 billion.

At the same time, the MoF signed two Memoranda of Understanding (MOUs) in February 2020 – one with the Italian Export Credit Agency (SACE) and the other with Korea Trade Insurance Corporation (K-SURE) – in an effort to strengthen trade and investment relations between the Kingdom and these two countries, and to “benefit from optimal funding for government projects in line with the Saudi Vision 2030.”

Under the MOU with SACE, the Italian ECA is working to strengthen its presence in the Kingdom by financing projects with Italian content and continuing to share best practices in the financing of export credit and insurance. Similarly, the agreement with K-Sure aims to strengthen bilateral partnerships and cooperation through financing imported goods and services from South Korea. The MOU also provides a credit limit to finance government projects with Korean content in the Kingdom.

The Saudi Arabian Monetary Agency (SAMA), in the meantime released in February additional licensing guidelines and criteria for digital-only banks in the Kingdom. These guidelines include that applicants for digital-only bank licenses must be set up as a locally incorporated joint-stock company and maintain a physical presence in Saudi Arabia.

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