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Saudi DMO Starts 2020 with a Two-Tranche SR6.72bn Sovereign Domestic Sukuk as 2019 Issuance Buoyancy Continues

The Debt Management Office (DMO) of the Saudi Ministry of Finance (MoF) started the year 2020 in a buoyant mood with a SR6.72 billion (US$1.79 billion) domestic Sukuk offering on 27 January 2020.

The issuance comprised two tranches – one a SR715 million (US$190.63 million) tranche with a 7-year tenor maturing in 2027; and a second tranche of SR6.005 billion (US$1.6 billion) with a tenor of 10-years maturing in 2030. The latter was oversubscribed with the order-book reaching SR7.842 billion (US$2.09 billion).

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, following the approval by the Capital Market Authority (CMA) of Saudi Arabia, according to the MoF, comes as part of “the DMO’s role in securing the Kingdom of Saudi Arabia’s debt financing needs with the best financing costs. The Programme will also contribute to the fulfilment of the objectives of the Ministry’s Fiscal Balance Programme and to the development of the Saudi Sukuk and Islamic Capital Market and objectives of KSA Vision 2030.”

As part of a diversified fund raising and government debt strategy, the MoF through the DMO also raised US$5 billion (equivalent to SR18.7 billion) through a conventional bond offering on 22 January 2020 under the Kingdom of Saudi Arabia’s Global Medium-Term Note Programme. This is the sixth issuance under that programme.

According to the DMO, the US$5 billion bond issuance was more than 4 times oversubscribed, with total orders amounting to more than US$23 billion. The bond issuance comprised three tranches including:

  1. i) US$1 billion (equivalent to SR3.75 billion) for 7-year notes maturing 2027,
  2. ii) US$1.25 billion (equivalent to SR4.68 billion) for 12-year notes maturing

2032, and

iii)     US$2.75 billion (equivalent to SR10.31 billion) for 35-year notes maturing

2055.

But it is the DMO’s domestic sovereign Sukuk policy that has been making the running in the MoF’s public debt strategy. 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’s Financial Sector Development Programme to enable financial institutions to support private sector growth and meet the objectives of the very KSA Vision 2030. 

In 2019, the DMO issued twelve consecutive monthly domestic Sukuk ending the year with a four tranche SR5.099 billion (US$1.36 billion) Sukuk offering in December, 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.

The demand dynamics of the Saudi Sukuk market is highlighted by strong and sustainable domestic institutional investor interest. The SR5.099 billion (US$1.36 billion) Sukuk issuance in December 2019, for instance, was oversubscribed over seven times with the total orders received amounting to SR38.253 billion (US$10.20 billion).

The Kingdom also issues Sukuk in the international market, usually US dollar-denominated issuances. The last one was in October 2019, with a 10-year US$2.5 billion Sukuk issuance. Prior to that the DMO issued Sukuk in the international market in September 2018 and in April 2017.

Saudi banking sources expect the DMO’s buoyant domestic sovereign Sukuk issuance to continue through 2020 given the vagaries of the volatility of the crude oil market and prices; the continuing tension in the Middle East & North Africa (MENA) region, in the context of US-China trade tensions following the signing by US President Donald Trump of the Law on Hong Kong Trade in December 2019 to the chagrin of China, the continued tension between the US and Iran, and the fallout and economic impact of the Corona virus outbreak in Wuhan and China, which in early February 2020 had already impacted negatively on oil exports to China.  

Factors impacting on Saudi sovereign Sukuk and bond issuance include the knock-on effect on the Saudi budget and hence the economy of oil price volatility with the Kingdom 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. The increasing incidence of longer-term tenors of up to 30 years is also helping to refine a long-term financing pricing process for Saudi sovereign issuances through building up a yield curve and also serving as a reference point to price mortgage and savings products.

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 bears 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.

All the Saudi Riyal-denominated 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. Tadawul is also encouraged by the full inclusion of Saudi Arabia in the MSCI Emerging Market Index and the  launching of the Disclosure Professional Certificate for issuers of securities and investment funds, in an effort to enhance quality of disclosures in accordance to Listing Rules and Regulations, which will be mandatory from 01/01/2021.

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