Sovereign Domestic Sukuk – Saudi Arabia

Saudi NDMC Raises a Staggering SAR67.40bn (US$17.97bn) in the Saudi Riyal-denominated Market Through Two Sukuk Transactions in the Last Two Weeks of May 2024 as Sukuk Gathers Greater Momentum Given the Rising Demand for Infrastructure Financing

 The National Debt Management Centre (NDMC) of the Saudi Ministry of Finance (MoF), following the successful issuance of its seventh Sukuk offering in the international market at end May 2024, continued its issuance momentum in the Saudi riyal-denominated domestic market with two transactions in the same month which raised an aggregate SAR67,402.50mn (US$17,970.37mn).

If we add the US$5bn (SAR1,330.00mn equivalent) global Sukuk issued on 29 May 2024 then the aggregate funds raised through Sukuk issuance by the NDMC in the last two weeks of May totals a staggering SAR68,732.50mn (US$22,970.37mn US dollar equivalent) – by far the most prolific sovereign issuer of Sukuk in the world.

These developments coincide with Moody’s Investors Service affirming Saudi Arabia’s credit rating at ‘A1 with a ‘Positive’ outlook on 24 May 2024. The rating affirmation is based on Moody’s assessment of “the Saudi government’s significant progress” in implementing broad-based reforms since 2016 and the track record of macroeconomic and fiscal policy effectiveness that will support the sustainability of the Government’s economic diversification strategy aimed at supporting non-hydrocarbon GDP growth.

The NDMC successfully closed its fifth consecutive monthly domestic sovereign Sukuk issuance as per its annual issuance calendar on 21 May April 2024 raising an aggregate SAR3,231.50m (US$861.56m) through two tranches – a first tranche of SAR71.00mn (US$18.83mn) with a tenor of 4.8 years maturing on 23 January 2029 and priced at a yield of 5.16 % per annum and a price of SAR94.82757 and bids received totalled SAR71.00mn; and second tranche of SAR3,160.50mn (US$842.90mn) with a tenor of 12 years maturing on 25 April 2036 and priced at a yield of 5.41 % per annum and a price of SAR101.56161 and bids received totalled SAR3,160.50mn.

This follows the SAR7,395.836mn (US$1,971.91mn) three-tranche transaction conducted by the Saudi Central Bank (SAMA) in April 2024.

The NDMC started 2024 where it had left off in 2023 with a robust issuance of Riyal-denominated Sukuk in the domestic market with five consecutive monthly multi-tranche transactions in the first five months to date, which were all fully subscribed by selected local and foreign institutional investors, suggesting a robust sustained trajectory of the issuance and demand for Saudi government securities. It is consistent with the issuance trend of 2023.

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.”

In a statement, the NDMC stressed that “this issuance confirms the NDMC’s statement in February 2022, that it will continue, in accordance with the approved Annual Borrowing Plan, 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 manage the debt repayments for the coming years while considering market movements and the government debt portfolio risk management.”

Total Volume in 2024 Projected to Exceed 2023 Figure

In 2023, the total volume of funds raised by the Saudi Ministry of Finance through all sovereign Sukuk issuances reached a staggering SAR104,020.582 million (US$27,729.11 million), of which SAR81.51 billion came through domestic Sukuk issuances.

Thus far in the first five months of 2024, the NDMC has already raised an aggregate SAR32,593.086 million (US$8,689.74 million) through five auctions – well on its way to potentially exceed its issuance volume in 2023, given the need to finance the 2024 budget deficit (albeit modest) and the huge infrastructure funding requirements especially associated with the giga NEOM projects and issuance under its newly-launched Green Financing Framework (GFF) unveiled by the Saudi Ministry of Finance in March 2024.

“Saudi Arabia has established its Green Financing Framework in accordance with the Green Bond Principles 2022, as published by ICMA. Under this Framework, the Kingdom will be able to issue Green Bonds/Sukuk,” says the GFF document.

The Kingdom is by far the single most proactive sovereign domestic Sukuk issuer in the world. The NDMC’s 2024 Calendar of Local Sukuk Issuances, released in January, double downs this issuance momentum and 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 from both local and international investors.

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 MoF intends to continue borrowing to finance the estimated 2024 budget deficit and refinance debt maturities due in FY 2024. Additionally, the NDMC “will remain vigilant in identifying and pursuing favourable market opportunities to implement additional financing activities to refinance debt maturities in the coming years. The Government remains committed to leveraging market opportunities to execute alternative government financing activities that promote economic growth, such as financing capital projects and infrastructure developments.”

The NDMC says it is committed to ensuring the Kingdom’s sustainable access to various debt markets to issue sovereign debt instruments at fair prices while maintaining prudent risk levels. To achieve this objective, it will continue to diversify financing channels throughout 2024. This diversification will include expanding financing through export credit agencies (ECA’s), financing infrastructure projects, and exploring tapping into new markets in new currencies. These initiatives aim to expand the investor base and enhance the Kingdom’s access to global capital markets.

Early Redemption and One-off Mega New Issuance

In fact, the second transaction in the domestic market, by far the major one, conducted by the NDMC in May 2024 was the SAR64,100.00mn (US$17,089.88mn) Sukuk issued as an occasional one-off offering to rebalance and manage the Government’s debt redemption and future issuance maturities profile.

Indeed, on 30 May 2024 the NDMC completed an early purchase of a portion of the Issuer’s outstanding debt instruments maturing in 2024, 2025 and 2026 with a total value exceeded SAR63.1bn (US$16.82bn).

“The above initiative,” explained the Ministry of Finance, “is a continuation of NDMC’s efforts to strengthen the domestic market. Furthermore, this initiative enables NDMC to better exercise its role in managing government debt obligations and future maturities. This will also align with the NDMC’s effort with other initiatives to enhance the public fiscus in the medium and long term.”

The SAR64.1 billion transaction, according to the NDMC, comprised three tranches – a first tranche of 7-year SAR16bn (US$4.27bn) Sukuk maturing in 2031; a second tranche of a 10-year SAR29.3bn (US$7.81bn) Sukuk maturing in 2034; and a third tranche of a 15-year SAR18.8bn (US$5.01bn) Sukuk maturing in 2039.

The Ministry of Finance (the Issuer) and NDMC mandated HSBC Saudi Arabia, AlRajhi Capital, SNB Capital, AlJazira Capital and Alinma Investment as Joint Lead Managers and Bookrunners to lead the transaction.

The NDMC continues to work on attracting new capital, and more 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. Already, BNP Paribas, Citigroup, Goldman Sachs, J.P. Morgan, and Standard Chartered Bank have signed up as new primary dealers in the government’s local debt instruments.

They join 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.

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