Sovereign Domestic Sukuk – Saudi Arabia

Saudi NDMC Starts 2024 with a Robust Statement of Intent of Domestic Sovereign Sukuk Issuances Through Two Auctions Raising an Aggregate SAR16.7bn (US$4.5bn) in January and February

The National Debt Management Centre (NDMC) of the Saudi Ministry of Finance started the new year where it had left off in 2023 with a robust issuance of Riyal-denominated Sukuk in the domestic market in two transactions in January and February this year.

The NDMC raised an aggregate SAR16.699 billion (US$4,452.54 million) in two three tranche auctions – one on 16 January 2024 and the other on 13 February 2024, which were both fully subscribed by selected local and foreign institutional investors, suggesting a sustained trajectory of issuance and demand for Saudi government securities, consistent with the issuance trend of 2023, with the NDMC’s final Sukuk issuance of the year on 19th December 2023 raising a total SAR10,553. 219 million (US$2,814.00 million), thus closing the year on a high note. Full details of the January and February tranches are set out in the table below.

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 January 2024, the NDMC reiterated its proactive support for sovereign Sukuk issuance in 2024 by publishing a full consecutive monthly calendar of issuances for the year ahead and its Annual Borrowing Plan (ABP) Report for 2024. The projected distribution of fund-raising channels for 2024 under the ABP comprises:

i) Up to 35% of the total funding plan through the domestic SAR-denominated debt market through monthly Sukuk auctions.

ii) Up to 40% of the total funding plan in the international debt markets through the issuance of conventional bonds and Sukuk – usually US dollar-denominated.

iii) Up to 50% of the total funding plan through Government Alternative Funding (GAF) channels.

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 taking into account market movements and the government debt portfolio risk management.”

Resilient Macroeconomic Dynamics

The Saudi sovereign Sukuk issuance programme, together with that of the Malaysian Government Sharia’a Securities (MGSS), is the mainstay of the global Sukuk market in terms of commitment, volumes and frequency. Despite some budgetary and inflationary pressures and the vagaries of the oil price and supply markets, Saudi Arabia’s economy remains on a steady footing, albeit the appetite for fund raising seems insatiable, largely driven by the Kingdom’s massive NEOM initiative and associated projects, to which an estimated US$2.3 trillion have reportedly been committed to date.

The updated World Economic Outlook (WEO), published by the International Monetary fund in January 2024, estimates real GDP growth in Saudi Arabia at minus 1.1% in 2023, projected to rise to a positive 2.7% in 2024 and 5.5% in 2025, on the back of wider sentiments that the global economic recovery is proving resilient and inflation is falling faster than expected. Global growth is now projected at 3.1% in 2024 – 0.2% higher than the October 2023 WEO forecast.

In its latest rating action report, Fitch Ratings in early February 2024 affirmed Saudi Arabia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with Stable Outlook. The rating, according to Fitch, reflects the Kingdom’s strong fiscal and external balance sheets, with government debt/GDP and sovereign net foreign assets (SNFA) considerably stronger than both the ‘A’ and ‘AA’ medians, and significant fiscal buffers in the form of deposits and other public sector assets. The rationale is further underpinned by the assumption that SNFA will remain above 50% of GDP in 2024-2025, which is large relative to ‘A’ median (6% of GDP) and ‘AA’ median (34% of GDP). Fitch also highlighted fiscal reforms which increase the budget’s resilience to oil price volatility which could have a positive impact on the rating. Fitch forecasts Saudi real GDP growth of 4.5% in the non-oil sector in 2024-2025, following an average of around 5% in 2022-2023.

Upward Trajectory of Sukuk Issuance

In 2023 the NDMC through 12 consecutive monthly domestic Sukuk transactions raised SAR45,610.582 million (US$12,159.11 million) in the January-December period, compared to SAR86,491.29 million (US$23,042.00 million) and SAR65,741.315 million (US$17,491.51 million) for the same periods in 2022 and 2021 respectively.

If we add these to the dual tranche Sukuk totalling US$6 billion issued through the Government Alternative Funding (GAF) channel in May 2023 and a standalone Sukuk tranche under the Local Saudi Sukuk Issuance Program in Saudi Riyal of SAR35.9 billion (US$9.57 billion) in August 2023, then the total amount of funds raised through 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.

Public Debt Priorities for 2024

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.

“This initiative is a continuation of the NDMC’s efforts to strengthen the domestic market and to keep up with market developments which have been reflected positively on the growing trading volume in the secondary market. Further, this initiative enables the NDMC to exercise its role in managing the government debt obligations and its future maturities. This will also align the NDMC’s efforts with other initiatives to enhance the public finance in the medium and long term,” stressed the NDMC.

Public Debt Dynamics

As outlined in the 2024 National Budget statement, the budget deficit is projected to reach SAR79 billion (US$21.07 billion), resulting in total funding needs for 2024 of approximately SAR86 billion (US$22.93 billion) after securing approximately SAR14 billion (US$3.73 billion) of the 2024 total financing needs in 2023 through pre-funding activities encompassing both debt maturities and deficit financing requirements. By the end of 2024, the total debt portfolio is anticipated to reach SAR 1,115 billion (US$297.31 billion).

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.

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 already in the NDMC’s Primary Dealers Programme, namely Saudi National Bank, Saudi British Bank (SABB), Al Jazira Bank, Alinma Bank, and Al Rajhi Bank.

Share this post