Government to boost Saudi sukuk issuance

Programme seen absorbing a significant portion of liquidity in the kingdom’s banking system This view is supported by the absence of conventional corporate bond issues in Saudi Arabia since 2013, while sukuk issuance was $7.8 billion in 2014.

Areturn to debt issuance by the Saudi Arabian government could encourage growth in the country’s corporate sukuk market, according to analysts.

Last year, Saudi Arabia was the second-largest sukuk issuer with 15 issuances worth $12.1 billion (Dh44.4 billion), yet in terms of value the issuances declined by 20.5 per cent year on year. According to Saudi bank NCB There are few issuances in the pipeline such as the National Shipping Company of Saudi Arabia with an announced value of 3.9 billion Saudi riyals over a 10-year tenor denominated in riyal.

“The economic moderation has largely affected debt markets, however, the possibility of the government resorting to debt to plug the significant fiscal shortfalls can provide a boost to sukuk issuances going forward. On a medium-term note, opening Saudi sukuk to foreign investment similar to the domestic stock market will likely jump-start sukuk trading in the secondary market that is currently negligible,” NCB said in a recent note.

In 2014, sukuk trading was 108.1 million riyals and by the end of the first quarter of 2015 a single deal was done at 213.5 million riyals, a weak showing for a market that has listed issuances worth 25.5 billion riyals.

Analysts see an imminent government borrowing programme could absorb a significant portion of iquidity in the banking system which could eventually apply pressure on their ability to lend to the private sector.

Much of the government debt is likely to be bought by the country’s banks, which would consume some of the plentiful liquidity that has helped make bank lending the primary source of funding for Saudi corporates, rating agency Fitch said in recent note.

Capex programmes

According to the rating agency, even without sovereign issuance lower oil prices may affect banks’ lending appetite, which could reduce the cost difference between loans and sukuk or bonds for issuers.

“We believe corporates will largely maintain their capex programmes and some funding for these plans may therefore move to the sukuk market. Sovereign debt issuance would create another benefit for potential corporate issuers by helping create a pricing benchmark. We believe Saudi corporates are more likely to issue sukuk than bonds because of the wider local investor base for sukuk and because some are restricted to Sharia-compliant borrowing by their own rules,” said Bashar Al Natoor, Global Head of Islamic Finance at Fitch.

Regional and international investors are also happy to invest in sukuk. This view is supported by the absence of conventional corporate bond issues in Saudi Arabia since 2013, while sukuk issuance was $7.8 billion in 2014.

Another factor that is likely to spur Saudi sukuk issuance in the medium term is the Capital Market Authority’s plan to reform the corporate debt market, including measures to make regulatory approval of debt products easier.