Saudi NDMC Starts 2021 with SAR2,955m (US$788.85m) Domestic Sukuk in January Following on From a Record SAR85bn (US$22.64bn) Domestic Sukuk Issuance Programme in 2020

The sustainability of and commitment to using domestic Sukuk as a public debt finance instrument was reinforced in January 2021 when the National Debt Management Centre (NDMC) of the Saudi Ministry of Finance (MoF) closed a SAR2,955 million (US$788.85 million) Two-tranche Sukuk under the Saudi Arabian Government SAR-denominated Sukuk Programme.

Equally important is the publishing by the NDMC of its Domestic Sukuk Issuance Calendar for 2021 which commits to a consecutive monthly Sukuk issuance strategy from January to December 2021. The news augurs well for the Saudi and global Sukuk market in 2021, despite the ongoing economic, health and social impact of the COVID-19 pandemic and the emerging mutations and variants of the virus. No other jurisdiction was committed to such a dedicated domestic Sukuk issuance regime in 2021.

In fact, the indications are that Sukuk issuance will hold its own in 2021 if not surpassing the 2020 figure with the entry of new issuers such as Sarwa Capital in Egypt and Eskom in South Africa; the stated emergence of non-traditional issuers such as the UK, South Africa, Bangladesh and Algeria; and the growing number of regular sovereign domestic issuers including Saudi Arabia, Malaysia, Indonesia, Bahrain, Turkey, Oman; in addition to multilaterals such as the Islamic Development Bank Group and the IILM.

Last year, 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). In addition, the NDMC also raised SAR34,645 million (US$9,236.77 million) from a four-tranche standalone auction last July, 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.

NDMC has confirmed that it has merged all the Saudi Government domestic Sukuk issuance under the Sukuk Programme, and there would be no Saudi Riyal-denominated offerings other than under the Programme henceforth. The Kingdom will separately continue to tap the market with foreign currency-denominated Sukuk issuances and conventional bond offerings in the international market. The NDMC has yet to confirm its total funding plan for 2021 (it amounted to SAR220 billion in 2020). 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, Supply Chain Financing, in addition to unifying the domestic Sukuk issuance programmes.”

Indeed, in tandem with the domestic Sukuk issuance, the NDMC in January 2021 raised US$5 billion (SAR18.751 billion) through a conventional bond offering – the eighth under the Kingdom of Saudi Arabia’s Global Medium-Term Note Programme.

According to the NDMC, the issuance was more than 4 times oversubscribed, with total orders amounting to more than US$22 billion. The transaction comprised a US$2.75 billion (SAR 0.3 billion) tranche with a tenor of 12 years maturing in 2033, and a US$2.25 billion (SAR8.4 billion) tranche with a tenor of 40 years maturing in 2061.

Similarly, the SAR2,955 million Sukuk issued in January comprised two tranches:

i) A first tranche of SAR2,075 million (US$553.23 million) with a 7-year tenor maturing in 2028 and priced at a final fixed profit rate and yield of 1.97% per annum, with total bids amounting to SAR2,075 million.

ii) A second tranche of SAR880 million (US$234.62 million) with a 12-year tenor maturing in 2033 and priced at a final fixed profit rate and yield of 2.55% per annum, with total bids amounting to SAR880 million.

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.   

The Saudi sovereign domestic Sukuk issuance is also driven by the high volume of trading of Sukuk certificates in the secondary market on the Tadawul (the Saudi Stock Exchange) and allowing these certificates holders to benefit from the Zakat redemption applied within the framework of the local currency Sukuk issuance programme. The continued traction and upward growth trajectory of Saudi domestic Sukuk issuance is driven by robust investor demand and the emergence of tenors of up to 40 years, which is underlined by the high investor oversubscription.

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.

Moody’s Investors Services in October assigned (P)A1/Aaa.sa rating to The Government Saudi-riyal denominated Sukuk Programme for 2021. “This rating,” said Saudi Minister of Finance, Mohammed Al-Jadaan, “reflects the strength, flexibility and capability of the Kingdom’s economy in facing global economic challenges and confirm great confidence in the Saudi economy.” It also contributes to achieving the objectives of the Financial Sector Development Programme in deepening the market and developing local debt markets to further attract foreign investors in the local debt capital market.

There is growing domestic and international demand for fixed income assets in the kingdom that are Sharia’s compliant. FTSE Russel in its latest report on the Saudi Government Bond Market published in December 2020, observed that financial market reforms and improved foreign investor access to Saudi markets are part of the Kingdom’s reform process.

“This includes the development of a full, and liquid, market in local currency Sukuk issues. Bond/Sukuk issuance is increasingly skewed towards local currency riyal issuance, as a result. Saudi’s favourable credit record, and robust exchange rate peg to the US dollar since 1986, is reflected in high credit ratings. Saudi bonds/Sukuk show quite high correlation to US dollar bonds, reflecting the exchange rate peg, and provided this remains in place, local currency bond/Sukuk returns are not at risk from exchange rate weakness for foreign investors during global market shocks,” added the report.

The main driver for Sukuk/bond issuances in the Kingdom is the Vision 2030 infrastructure programs, which according to the report “require substantial expenditure over the next decade, and increased issuance of local currency government bonds, to develop a full yield curve in riyal government bonds. The impact of the COVID-19 pandemic in driving oil prices lower and reducing global demand for oil via economic lockdowns has reinforced the need for a fully liquid local currency government bond/Sukuk market, with a full range of issuance options and yield curve. This has meant the relative size of issuance in riyal and US dollars has been skewed towards riyal issuance in recent years, and trading activity has grown rapidly in the Sukuk riyal market, relative to the traditional dollar issues, which tend to be bought and held to maturity.”

The report notes that Saudi’s government indexes carry the same credit ratings in both local currency and US dollars. “Saudi’s local currency riyal bonds/Sukuk are rated quite conservatively, and it is worth noting that both the sovereign riyal bonds/Sukuk, and the dollar bonds/Sukuk, trade on a de facto higher credit rating than A-, judged by credit spreads.”

Saudi Sovereign Domestic Sukuk Issuance January 2021

Source: Compiled by Mushtak Parker from Data of the NDMC, Saudi Ministry of Finance January 2021