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Saudi NDMC Issues Eighth Consecutive Monthly Domestic Sukuk in August as Total for January-August 2021 passes SAR59.55bn (US$15.87bn)

The National Debt Management Centre (NDMC) of the Saudi Ministry of Finance (MoF) issued its eighth consecutive monthly issuance of Riyal-denominated sovereign Sukuk with a three-tranche SAR11,358.615 million (US$3,028.18 million) offering on 19 August 2021.

This follows the closing of a similar two-tranche SAR10.412 billion (US$2,772.62 million) offering in July 2021 – all under the unlimited Saudi Arabian Government SAR-denominated Sukuk Programme. This means that in the first eight months of 2021, the NDMC has raised the equivalent of SAR59,552.414 million (US$15,876.53 million) through eight domestic sovereign Sukuk issuances.

The SAR11,358.615 million (US$3,028.18 million) offering comprised three tranches offered through three auctions held on 16 August 2021:

1. A first tranche of SAR2,508.25 million (US$668.75 million) with an 8-year tenor maturing on 19 August 2029 and priced at a final fixed profit rate/yield of 2.43% per annum, with total bids amounting to SAR2,508.25 million (US$668.75 million); and
2. A second tranche of SAR4,485.361 million (US$1,195.89 million) with a 12-year tenor maturing on 21 January 2033 and priced at a final fixed profit rate/yield of 2.88% per annum, with total bids amounting to SAR4,485.361 million (US$1,195.89 million).
3. A third tranche of SAR4,365.004 million (US$1,163.70 million) with a 15-year tenor maturing on 19 August 2036 and priced at a final fixed profit rate/yield of 3.21% per annum, with total bids amounting to SAR4,365.004 million (US$1,163.70 million).

The NDMC’s Domestic Sukuk Issuance Calendar for 2021 commits to a consecutive monthly Sukuk issuance strategy from January to December 2021. No other jurisdiction has committed to such a dedicated domestic Sukuk issuance regime in 2021. Moody’s Investors Services in October assigned (P)A1/Aaa.sa rating to the Government’s Saudi-riyal denominated Sukuk Programme for 2021.

In 2020, according to data compiled by Mushtak Parker for this newsletter from MoF statistics, the NDMC issued under its Sukuk Issuance Programme domestic Sukuk totalling SAR50,393 million (US$13,433.13 million) with total bids amounting to SAR79,100 million (US$21,085.17 million). This means that the January-August 2021 total of SAR59,552.414 million (US$15,876.53 million) has already surpassed the entire total for 2020.

The NDMC also raised SAR34,645 million (US$9,236.77 million) from a four-tranche standalone auction in July 2020, bringing the total Saudi-riyal denominated Sukuk issued by the government in 2020 to SAR85,038 million (US$22,638.35 million), which is almost a 50% increase on the previous year.

Saudi Sukuk issuance is expected to sustain its buoyancy in the second half of 2021 thanks to the demands of Saudi Vision 2030 and the government’s economic reform agenda. “We expect this to continue over the next few years. We believe government debt issuance can be instrumental in addressing the absence of a benchmark yield curve and contribute to the development of the Kingdom’s debt capital markets,” explained S&P in a recent report.

The rating agency views the development of Saudi debt markets as broadly supportive of credit profiles of the Kingdom’s banks and corporates over the long term. “We believe that continued issuance by the Saudi sovereign could attract more attention from investors given their search for higher-yielding investments in an era of low interest rates. The availability of a well-functioning domestic debt capital market can also help expand the Saudi banking system’s funding sources,” added the S&P report.

Sukuk issuance, which is particularly suited to financing infrastructure and urban regeneration, is also relevant in the context of the efforts of the G20 to boost investment in these sectors, and through privatisation.

“Our aim is to secure about US$55 billion out of this privatization plan, of which US$16.5 billion will be in the form of public-private partnerships. We are looking to foster stronger partnership with the private sector on the management and financing of health infrastructure and services, as well as city transportation networks, school buildings, airport services, and water desalination and sewage treatment plants through these partnerships. The driving force is to create a better, more cost-effective, and efficient delivery, reducing material and energy usage for a better planet.”

Domestic Sukuk issuances are also driven by the objectives of the Kingdom’s Fiscal Balance Programme and Financial Sector Development Programme, the robust demand from local institutional investors, and the fact that foreign investors can also invest in local currency Sukuk through Tadawul (the Saudi Stock Exchange), which also has an active secondary trading in government Sukuk.

In the case of Sukuk, NDMC has confirmed that it’s Sukuk issuance strategy going forward centres around the Saudi Government SAR Sukuk Programme and foreign currency-denominated Sukuk issuances, as well as conventional bond offerings in the international market. This year’s plan will similarly be “through diversified funding sources which include domestic and international Sukuk and bond issuances as well as new financing channels, including Government Alternative Financing, [and] Supply Chain Financing, in addition to unifying the domestic Sukuk issuance programmes.”

The Kingdom is by far the single most proactive sovereign domestic Sukuk issuer. All the Kingdom’s sovereign domestic Sukuk issuances come under the unlimited Saudi Arabian Government Saudi Riyal denominated Sukuk Issuance Programme established on 20 July 2017 by the Ministry and updated on 20 July 2020 “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 NDMC’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 Markets.

Saudi Arabia is ahead in tapping the domestic sovereign Sukuk market, because it has an established issuance infrastructure complete with a government policy framework under its Fiscal Balance Programme and Financial Sector Development Programme, whose objectives inter alia is to add to a diversified public debt fund raising strategy and to the development of the Saudi Sukuk and Islamic Capital Market.

In August the MoF and NDMC appointed Al Rajhi Bank as a primary dealer in government local debt securities (Sukuk) to join Alinma Bank, Bank Al-Jazira, Saudi National Bank, and Saudi British Bank.

Al Rajhi Bank’s addition to the primary dealer network for riyal-denominated sovereign Sukuk issuance, according to Abdulaziz Al Furaih, Chairman of the Steering Committee at the MoF, will expand the investors base in the primary market to secure the Kingdom’s domestic debt financing requirements, support the development of the secondary market by increasing the liquidity of the government local debt securities, and collaborate with the NDMC on the development of the debt capital market in the Kingdom.

NDMC Acting CEO, Hani Al Medaini, emphasizes that primary dealers raise the efficiency of financial transactions in government local debt securities through
establishing clear and transparent frameworks for their clients and enhance the collaboration between financial institutions in developing the local debt market which has seen “progressive leaps in trading volumes that reflect the investors trust in local debt securities.”

The primary dealers also play an important role of market makers for government domestic Sukuk issuances especially for trading in the secondary market in accordance with the regulations of the Saudi Capital Market Authority (CMA).

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