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Sovereign Domestic Sukuk – Saudi Arabia

Saudi DMO Maintains Domestic Sovereign Sukuk Issuance Momentum with Fifth Consecutive Offering as Tadawul Reduces Minimum Denomination of Domestic Government Debt Instruments

The Debt Management Office (DMO) of the Saudi Ministry of Finance continued its on-going domestic sovereign Sukuk issuance in May 2019 with a two-tranche Riyal-denominated issuance totaling SR2,840 million (US$760 million). 

The transaction comprised a first tranche of SR0.655 billion (US$174.68 million) with a tenor of 9 years maturing in May 2028, and a total tranche size of SAR 2.705 billion, matures in 2028; and a second tranche of SR2,185 billion (US$580 million), with a tenor of 12 years and maturing in May 2031, respectively.

This follows the previous domestic issuance in April 2019 – a four-tranche offering totaling SR11.619 billion (US$3.10 billion).  All the above issuances are issued under the Saudi Arabian Government’s unlimited SR-denominated Sukuk Programme.

The stand out feature of one of the April tranches was that for the first time the DMO issued a Sukuk with a 30-Year maturity.  Previously the SMO capped the debt maturity ceiling for bond issuances at 10 years.

The longer maturity explained the DMO in a statement “will be valuable for long-term financing pricing in the Kingdom and … will support infrastructure projects, as well as public and private sector debt issuances.”

This is the fifth consecutive monthly domestic Sukuk issued by the DMO thus far in 2019, bringing the total domestic sovereign Sukuk issued from January to May 2019 to SR37.005 billion (US$9.87 billion).  This maintains the Kingdom’s pre-eminence as the most prolific issuer of sovereign Sukuk in the world.

The issuance comes on the back of encouraging macro-economic data and forecasts for the Saudi economy going forward by the latest 2019 Article IV Consultations by the International Monetary Fund (IMF) published in May 2019 and the latest Credit Opinion Report on the Kingdom by Moody’s Investors Service.

Indeed the Article IV Consultation commended the on-going financial market reforms which culminated in getting the Kingdom listed in the global stock and bonds markets indices and the expansion of the government bonds/Sukuk yield curve towards longer-term maturities “which will contribute in developing the financial sector and deepening the debt market of the private sector.”

The IMF particularly noted the Kingdom’s on-going economic reforms and the recovery in the non-oil sector, which contributed to improving the economic outcomes in 2018. It projects that the growth rate of the non-oil sector will accelerate to 2.9 % in 2019, as the increasing government spending and reforms implementation will likely drive economic growth. The statement also indicated an improvement in the transparency of government spending and public finance.

Saudi Minister of Finance, Mohammed bin Abdullah Al-Jadaan, stressed in the Quarterly Budget Performance report that the stability and improvement of fiscal performance “is a fundamental pillar of comprehensive and sustainable economic growth in the short and medium terms, and as such, it contributes to achieving the economic and social objectives of the Kingdom’s Vision 2030.”

Moody’s at the same time, which re-affirmed its sovereign rating of Saudi Arabia at A1 with a Stable Outlook, noted that “the stable outlook reflects our view that risks to Saudi Arabia’s credit profile are broadly balanced. Positive developments could stem from the implementation of wide-ranging reforms that enhance competitiveness and private-sector employment while moving the budget towards balance as the government projects to happen by 2023.

“Increasing confidence that structural reforms aimed at reducing the reliance of Saudi Arabia’s economy and public finances on oil revenues are more effective than in our baseline scenario could, over time, support higher rating.”

The agency forecast Saudi GDP growth for the period (2019-2020), to reach 2.5 % and 2.5 %, respectively.

In a further move to support the bond and Sukuk market in the Kingdom, the Saudi Stock Exchange (Tadawul) at the request of the Ministry of Finance is reducing the minimum denomination of domestic government debt instruments – 29 issuances between 2017-2019 – from SR1 million to SR1,000, without changing the size of the 29 issuances.

This follows the changes to fees for bond/Sukuk issuers, members and investors that were agreed by the Capital Market Authority (CMA) of Saudi Arabia, the Tadawul, and the DMO last month. Both the reduction of the minimum denomination and the changes to the fees will come into effect on 9 June 2019.

All these achievements, added the DMO, are also in line with the Kingdom’s Financial Sector Development Programme to enable financial institutions to support private sector growth and meet the objectives of Saudi Arabia Vision 2030. All the Saudi Riyal Sukuk issuances are now listed on the Tadawul for trading, with the hope this will develop into a robust secondary market especially for domestic issuances.  The Kingdom’s domestic Sukuk issuance programme is set to continue at least for the next five years as Riyadh aims to achieve a balanced budget in 2023.

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