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Saudi DMO Maintains Domestic Sovereign Sukuk Issuance Momentum with Seventh Consecutive Offering as 2019 Offerings to Date Reach US$12 billion

The Debt Management Office (DMO) of the Saudi Ministry of Finance continued its on-going monthly domestic sovereign Sukuk issuance in July 2019 with a three-tranche riyal-denominated offering totaling SR5.216 billion (US$1.39 billion). The issuance comes some two weeks after the Kingdom successfully priced its maiden Euro-denominated, and fifth international, bond issuance under its Global Medium-Term Note Programme.

The €3 billion (SR12.7 billion) issuance was oversubscribed 4.5 times and comprised an 8-year €1 billion (SR4.2 billion) issuance maturing in 2027 and a 20-year €2 billion (SR8.4 billion) issuance maturing in 2039. Longer tenors are an increasing feature of Saudi government debt issuance – both bonds and Sukuk.

In April 2019 the DMO for the first time issued a Sukuk with a 30-year maturity, having previously capped the debt maturity ceiling for bond/Sukuk issuances at 10 years. The longer maturity according to the DMO “will be valuable for long-term financing pricing in the Kingdom [and] will support infrastructure projects, as well as public and private sector debt issuances.”

At the same time the Kingdom is now expected to take longer than the projected 2023 to balance its budget, which means that the DMO is almost certainly going to access more financing from the domestic and international markets from bond/Sukuk issuances. The Director General of the DMO Dr Fahd Al-Saif has already confirmed that the Kingdom plans to tap the international market with a Sukuk issuance of up to US$5 billion before the end of 2019.

In this respect the Eurobond adds a further twist to the government’s debt raising programme. Mohammed bin Abdullah Al-Jadaan, Saudi Minister of Finance, explained in a statement that “one of the advantages of offering a Euro bond is to increase the diversity of investors, as some investors invest in the euro currency exclusively. The very high demand has shown that the strength of Saudi Arabia enables it to enter multiple markets at any point in time and the capability of financing diversification.” Saudi banking sources stress that the currency diversification strategy will not be confined to bond issuances only but is highly likely to include Sukuk offerings. As such the Kingdom is likely to issue Euro Sukuk in addition to US dollar denominated Sukuk.

The latest SR5.216 billion July domestic Sukuk, issued under the Saudi Arabian Government’s unlimited SR-denominated Sukuk Programme, comprised three tranches:

  1. A first tranche of SR1.955 billion (US$520 million) with a 5-year tenor maturing in 2024.
  2. A second tranche of SR405 million (US$107.97 million) with a 9-year tenor maturing in 2028.
  3. A third tranche of SAR 2.856 billion (US$760 million) with a 15-year tenor maturing in 2034.

The DMO raised SR2,744 million (US$730 million) in June 2019 through a similar 3-tranche domestic Sukuk issuance, maintaining the Kingdom’s standing as one of the top two regular domestic Sukuk issuers of substance in the market (together with the government of Indonesia). 

This is the seventh consecutive monthly domestic Sukuk issued by the DMO thus far in 2019, bringing the total domestic sovereign Sukuk issued from January to July 2019 to SR44.965 billion (US$11.99 billion). 

The issuance comes on the back of encouraging macro-economic data and forecasts for the Saudi economy going forward by the latest 2019 Article IV Consultations by the International Monetary Fund (IMF) in July 2019 and the Saudi Ministry of Finance’s 2nd Quarter Performance Report of the state’s budget for 2019.

According to the MoF data, government revenues in 2Q19 totalled SR260.706 billion, and expenditures amounted to SR294.226 billion. The budget deficit during the quarter was about SR33.52 billion. For the first half (FH) of 2019, the budget deficit amounted to SR5.7 billion, compared to SR41.7 billion in the corresponding period in 2018. Al-Jadaan explained that the results of FH2019 “confirm the effectiveness of the financial and structural reforms implemented by the government, including diversification of government revenue sources through the implementation of initiatives aimed at increasing non-oil revenues, as well as development of public financial management to raise the efficiency and effectiveness of spending, which recently included the approval of the Government Procurement Law. The results, also, reflect the progress in executing development projects according to the Saudi Vision 2030.”

The IMF Executive Board issued a statement on the 2019 Article IV consultation with Saudi Arabia in its meeting with the MoF on 10 July 2019, commending the Kingdom’s progress made in implementing its agenda on fiscal, economic and social reforms. The statement reported that the reforms have begun to yield fruitful results and the prospects for the economy are positive.

The IMF expects that real non-oil growth will rise to 2.9% in 2019 with the increase in government spending and a high level of confidence in the Saudi economy. The Board underscored that the government’s continued implementation of economic policies and structural reforms will be a key to promoting non-oil growth and create job opportunities for citizens and achieving the objectives of the country’s Vision 2030 agenda.

The Board welcomed the reforms aimed at improving public financial management including the government procurement law, which will help raise the efficiency of government spending and reduce the risk of corruption in the procurement process. The statement praised the efforts exerted to enhance the transparency of public finances and the reforms adopted by the government to develop the non-oil economy. The Board similarly highlighted the strength of the financial sector and the ongoing reforms in the Saudi financial markets.

All these achievements, according to the DMO, are also in line with the Kingdom’s Financial Sector Development Programme to enable financial institutions to support private sector growth and meet the objectives of Saudi Arabia Vision 2030. All the Saudi Riyal Sukuk issuances are now listed on the Saudi Stock Exchange (Tadawul) for trading, with the hope this will develop into a robust secondary market, especially for domestic issuances. 

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