Saudi NDMC Domestic Sovereign Sukuk Issuance Momentum Continues with Closure of Two-tranche SAR3,465.56m (US$923.25m) Sukuk in February 2023, as Aggregate for First Two Months Reach SAR7,123.1m (US$1,897.9m)

The National Debt Management Centre (NDMC) of the Saudi Ministry of Finance (MoF) successfully closed its second consecutive monthly domestic sovereign Sukuk issuance on 15 February 2023 raising an aggregate SAR3,657.462 million (US$974.53 million) in the process through an two tranche auction conducted by the Saudi Central Bank (SAMA). The total amount of bids received was SAR3,713.449 million (US$989.45 million).

The NDMC kicked off with its first issuance of the year with a two-tranche auction completed on 24 January 2023 for an aggregate SAR3,465.561 million (US$923.25 million), with total bids reaching a robust SAR8,835.632m (US$2,353.89m).

The NDMC Sukuk are all issued under the unlimited Saudi Arabian Government SAR-denominated Sukuk Programme, which focuses on fixed-rate instruments “to hedge against risks of potential interest rate fluctuations.”

The two tranches auctioned in February 2023 comprised:
• A first tranche of SAR3,224.813 million (US$859.25 million) with an 8-year tenor maturing on 17 June 2031 and priced at a yield of 4.15% per annum and a price of SAR89.16791. Bids received totalled SAR3,280.80 million (US$874.17 million).
• A second tranche of SAR432.649 million (US$115.28 million) with a 14-year tenor maturing on 17 March 2037 and priced at a yield of 4.34% per annum and a price of SAR89.64542. Bids received totalled SAR432.649 million (US$115.28 million).

By this issuance, the NDMC in a statement stressed that it has “completed the funding of refinancing needs for the year 2023. In accordance with the Annual Borrowing Plan, it will “continue to consider additional funding activities subject to market conditions and through available funding channels locally or internationally through debt markets and government alternative financing. This is to ensure the Kingdom’s continuous presence in debt markets and to manage the debt repayments for the coming years, in addition to facilitating the financing of capital expenditures and infrastructure projects which will contribute to promoting economic growth while taking into account market movements and the risk management of the sovereign debt portfolio.”

In 2022 the Saudi Ministry of Finance issued an aggregate SAR86,491.29 million (US$23,042.00 million) of Saudi-riyal denominated Sukuk for the January-December period through consecutive monthly issuances. In the same period in 2021, according to data compiled by Mushtak Parker from official MoF reports, the NDMC issued an aggregate SAR65,741.315 million (US$17,491.51 million). Thus far in 2023, the NDMC has raised a total of SAR7,23.023 million (US$1,897.93 million) in the January-February period.

The Kingdom is by far the single most proactive sovereign domestic Sukuk issuer in the world. The NDMC’s 2023 Calendar of Local Sukuk Issuances, released in January, confirms the intention of issuing domestic sovereign Sukuk consecutively for each month of the year from January to December – the only sovereign issuer to commit to such a calendar in advance.

This commitment is partly driven by the robust market demand for Saudi Arabian sovereign domestic Sukuk certificates. The NDMC’s role is to secure Saudi Arabia’s debt financing needs with the most competitive financing costs. Saudi Arabia is ahead in tapping the domestic sovereign Sukuk market because it also has an established issuance infrastructure complete with a government policy framework under its ‘Fiscal Balance Programme and Financial Sector Development Programme’, whose objectives are to add to a diversified public debt fund raising strategy and to the development of the Saudi Sukuk and Islamic Capital Market.

The NDMC is currently working on attracting new capital, and international financial institutions in addition to selected local banks to take part in the Primary Dealers Program, to capitalize on the debt instruments arranged by the NDMC. In October, the Ministry of Finance and the NDMC signed agreements with BNP Paribas, Citigroup, Goldman Sachs, J.P. Morgan, and Standard Chartered Bank appointing them as primary dealers in the government’s local debt instruments. The cohort of international institutions join the five local institutions, namely, Saudi National Bank, Saudi British Bank (SABB), Al Jazira Bank, Alinma Bank, and Al Rajhi Bank, already in the NDMC’s Primary Dealers Programme.

According to Saudi Minister of Finance Muhammed Al Jadaan “these agreements are a continuation of the developmental steps taken towards achieving Vision 2030 objectives under the umbrella of the Financial Sector Development Program. This is primarily achieved through cooperation between relevant entities to develop the infrastructure of the local debt market and increase the liquidity of the government’s
local debt instruments by attracting more capital from foreign investors. This is in addition to enabling primary dealers and market participants to play their roles in providing appropriate tools.”

The MoF’s Annual Borrowing Plan Report for 2023 reflects a stable and encouraging scenario. The Sovereign debt portfolio increased during 2022 by about SAR52 billion to reach SAR990 billion, representing 25.0% of GDP, compared to 30.0% in 2021.

The increase, according to the Report, was mainly driven by prefunding activities that have been executed to manage refinancing risk amid a higher interest rate environment. Despite the increase in the debt portfolio in 2022, the debt-to-GDP ratio has decreased due to the fact that debt levels are increasing at a lower pace than the expected increase in GDP.

As per the 2023 official budget statement, sovereign debt is estimated to reach about SAR951 billion by the end of 2023, where financing needs stand at about SAR45 billion, after securing approximately SAR48 billion of the 2023 total financing needs in 2022 through pre-funding activities.

According to Saudi Finance Minister, Mohammed Al-Jadaan, “despite the expectation of achieving a budget surplus during FY 2023, the Kingdom aims to continue its funding activities in the domestic and international markets with the objective of repaying debt principal that will mature during FY 2023 and the medium-term; utilizing opportunities based on market conditions to enter into pre-funding and liability management transactions, financing strategic projects; and executing GAF transactions that will promote economic growth such as capital expenditure and infrastructure financing.”

“In addition, the NDMC will continue to consider additional funding activities subject
to market conditions and through available funding channels locally or internationally.
This is to ensure the Kingdom’s continuous presence in debt markets and to enhance the Kingdom’s debt portfolio characteristics, taking into account market movements and the government debt portfolio risk management.”

The 2023 debt portfolio split between domestic and international debt will be largely unchanged from 2022. The projected form of funding will be a mix of bonds, Sukuk (both in domestic and international markets), as well as all forms of GAF.

As far as the refinancing agenda for 2023, SAR108 billion was due to mature domestically and internationally. However, the NDMC successfully executed Sukuk and bond liability management transactions in 2022 where approximately SAR15 billion of 2023 domestic and international maturities were successfully refinanced through issuing new Sukuk and a bond. As a result, 2023 maturities were reduced to approximately SAR93 billion.

During 2022 the NDMC pre-funded about SAR48 billion to secure and reduce a portion of 2023 financing needs by proactively managing interest rate and refinancing risk. Moreover, says the Report, the NDMC will carefully calibrate new securities to preserve the average target maturity of the Kingdom’s debt portfolio.

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