The Debt Management Office (DMO) of the Saudi Ministry of Finance continued its domestic Saudi riyal denominated Sukuk issuance in December 2019 with its latest offering of a four tranche SR5.099 billion (US$1.36 billion) Sukuk issuance, following on from the SR1.415 billion (US$380 million) Sukuk issued in November 2019.
This latest foray into the market is the twelfth consecutive monthly domestic Sukuk issued by the DMO in 2019, 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.
The demand dynamics of the Saudi Sukuk market is highlighted by strong and sustainable domestic institutional investor interest. This latest SR5.099 billion Sukuk issuance in December, for instance, was oversubscribed over seven times with the total orders received amounting to SR38.253 billion (US$10.20 billion).
This latest SR5.099 billion issuance, which came under the unlimited Saudi Arabian Government SR-denominated Sukuk Programme, comprised four tranches:
i) a five-year tranche of SR159 million (US$42.38 million) maturing in 2025, with a total orderbook of SR2.574 billion (US$690 million);
ii) a ten-year tranche of SR1.183 billion (US$320 million) maturing in 2030, with a total orderbook of SR1.837 billion (US$490 million);
iii) a fourteen-year ranche of SR663 million (US$176.71 million) maturing in 2034, with a total orderbook of SR10.134 billion (US$2.7 billion); and
iv) a nineteen-year ftranche of SR3.093 billion (US$820 million) maturing in 2049, with a total orderbook of SR23.708 billion (US$6.32 billion).
Saudi banking sources expect the DMO’s hitherto buoyant domestic sovereign Sukuk issuance to continue through 2020 notwithstanding the vagaries of the volatility of the crude oil market and prices; and 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, as well as the continued heightened tension between the US and Iran.
While the US-China trade tension had some dampening effect on crude oil prices, the tension between the US and Iran saw prices rebound. Brent crude oil futures on 29 November, for instance, were trading at 2.4% down at US$62.57 per barrel, but in early January 2020 they rallied above the US$64.79 per barrel.
The EIA forecasts Brent spot prices will average US$61 per barrel in 2020, down from a 2019 average of US$64 per barrel. EIA expects crude oil prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of 2020.
Another factor that is driving Saudi Arabian government bond and Sukuk issuance is that the Kingdom is now expected to take longer than the initially 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.
Saudi domestic issuances have also pioneered and increasingly featured longer term tenors of up to 30 years. As can be seen from the order books for the 14 and 19-year tranches referred to above, Saudi institutional investors in domestic Sukuk, according to local bankers, prefer longer tenor issuances, with the increasing opportunity of secondary market trading on the Saudi Stock Exchange (Tadawul’s) domestic trading platform to start with.
The joining of Tadawul to several global emerging markets indices, according to the DMO, “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.”
The DMO is trying to develop the pricing process for Saudi sovereign issuances through building up a yield curve for longer tenor issuances of up to 30 years, which would support infrastructure projects, as well as public and private sector debt issuances, and also serve as a reference point to price mortgage and savings products by having it as a risk-free point on which price models are based on, and will also provide new investment products for the local market creating a new investor base such as pension funds, endowments, and insurance companies.
A further boost for Sukuk investors is the approval in December 2019 of new guidelines by Saudi Minister of Finance and Chairman of the Board of Directors of the General Authority of Zakat and Tax (GAZT), Muhammad Al-Jadaan, that the state bear the Zakat and income tax ensuing from investing in Sukuk (and bonds) and debentures that are issued by the Ministry locally in Saudi riyals until their due date.
The state, according to the Ministry, will bear the tax if the Sukuk or debenture holders submit their undertaking during the legal period as required by the GAZT regulations. The Sukuk applicable are those issued by the DMO under the unlimited Saudi Arabian Government SR-denominated Sukuk Programme, as of the year 2020.