Saudi Sovereign Domestic Sukuk Issuance Reaches US$12.42bn in First Half 2020 as NDMC raises US$2.25bn in June with a Three-Tranche Sukuk

Saudi Arabia’s reliance on domestic sovereign Sukuk issuance as part of its public debt strategy continued in June 2020 with The National Debt Management Center (NDMC) of the Ministry of Finance (MoF) raising SR8,495 million (US$2,250 million) through the issuance of a three-tranche Sukuk on 24 June.

This is the sixth consecutive monthly Sukuk issuance in 2020 to date. In May the NDMC raised SR5,755 million (US$1,531.34 million) in a two-tranche Sukuk, preceded by Sukuk offerings in March and April which raised a combined SR21,117.5 million (US$5,616.28 million) respectively. The latest issuance in June comprised a three-tranche transaction totaling SR8,495 million (US$2,250 million) consisting of:

i) A 7-year Tranche 1 totaling SR2,494 million (US$660 million) maturing on 27 January 2027 and priced at a final profit rate of 2.47% per annum and a final yield of 1.85%. The auction attracted bids totaling SR 5,017 million (US$1,340 million);

ii) A 10-year Tranche 2 totaling SR3,670 million (US$980 million) maturing on 23 March 2030 and priced at a final profit rate of 2.69% per annum and a final yield of 2.26%. The auction attracted bids totaling SR13,966 million (US$3,720 million, and

iii) A 15-year Tranche 3 totaling SR2,331 million (US$620 million) maturing on 24 February 2035 and priced at a final profit rate of 3.00% per annum and a final yield of 2.69%. The auction attracted bids totaling SR10,569 million (US$2,820 million).

These issuances like previous issuances saw robust investor demand.

The Saudi NDMC has a multi-prong government-debt raising strategy comprising raising more funds from the financial markets including through increased domestic and international Sukuk issuances in addition to international conventional bonds and drawing on their sovereign wealth fund (SWF) assets. The Kingdom is by far the single most proactive sovereign domestic Sukuk issuer.

The NDMC’s 2020 Calendar of Local Sukuk Issuances envisages 12 consecutive monthly issuances of Saudi-riyal denominated sovereign Sukuk. No other jurisdiction is committed to such a dedicated domestic Sukuk issuance regime. In the first six months of 2020, compiled from MoF data, the NDMC issued consecutive monthly issuances, raising a total SR46,583.5 million (US$12,42 million), with an average tenor of 10.99 years; an average final profit rate of 2.88% per annum and an average final yield of 2.49% per annum, with total bids amounting to SR47,469 million (US$12,65 million).

The continued traction and upward growth trajectory of Saudi domestic Sukuk issuance, driven by robust investor demand and the emergence of tenors of up to 30 and 40 years, is underlined by the fact that the total funds raised in the first half of 2020 is well almost two thirds of the total raised for the whole year in 2019.

The NDMC issued twelve consecutive monthly domestic Sukuk from January to December 2019 with an aggregate annual volume of SR69,839 million (US$18,610 million). This is a staggering SR23,054 million (US$6,150 million) year-on-year increase on 2018. The MoF also raised US$2,500 million through an international Sukuk in 2019, thus bringing the US dollar equivalent raised through Sukuk to US$21,110 million. In addition, the Kingdom also issues conventional bonds as part of its diversified fund-raising strategy. On 16 April, the Kingdom issued a US$7,000 million conventional bond under its Global Medium-Term Note Programme – its seventh international bond to date and its second one this year following a US$5,000 million three-tranche multi-tenor offering in January.

Saudi Sovereign Domestic Sukuk Issuance January-June 2020

Source: Compiled by Mushtak Parker from Data of National Debt Management Center, Saudi Ministry of Finance    June 2020

All the Kingdom’s sovereign domestic Sukuk issuances come under the unlimited Saudi Arabian Government Saudi Riyal (SR)-denominated Sukuk Programme, established on 20 July 2017 by the Ministry “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 DMO’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 Market.

There is no doubt that the Kingdom is feeling the health and economic impact of the Coronavirus (Covid-19) pandemic which necessitated the introduction of a SR120 billion (US$31.91 billion) COVID-19 Mitigation Package. This has further been exacerbated by the sharp fall in crude oil prices and in the Kingdom’s oil production. The price of Brent Crude Oil Futures closes at US$40.68/barrel, well down on the US$60+/barrel this time last year.

In June, Saudi officials and private sector executives including Abdulaziz Al Rasheed, Assistant Minister of Finance for International Financial Affairs, Dr. Fahad Al Dossari, Deputy Governor of the Saudi Arabian Monetary Agency (SAMA), Ayman Afghani, Deputy Minister of Economy & Planning, Mohammed Abunayyan, Chairman of ACWA Power and Ammar Al Khudairy, Chairman of SAMBA Financial Group, held a webinar discussing “Enabling the Saudi Economic Ecosystem in Response to the COVID-19 Pandemic.”

Assistant Minister Al Rasheed confirmed that the Coronavirus pandemic caused a sharp decline in global demand for oil and gas and that had a significant impact on government revenues, which required a revisit of 2020 spending plans, and a re-ordering of priorities with a focus on serving the health sector.  The challenge going forward is to foresee the financial situation over the current or next year, in terms of expectations of government revenues or planning for expenditures in line with the Vision 2030 objectives.

He confirmed that the value of initiatives aimed at providing cash liquidity to the private sector totaled about SR80 billion, in addition to allocating SR50 billion to accelerate payment of private sector’s dues. He indicated that more than 640,000 enterprises had benefited from postponement of Zakat declarations and 250,000 enterprises from VAT declaration postponement.

Dr. Fahad Al Dossari pointed out that SAMA announced the launch of a SR50 billion (US$13.33 billion) in March to support the private sector, especially MSME too mitigate the financial and economic impact of Covid-19. The number of contracts benefiting from the deferred payments programme exceeded 68,000 with a total amount exceeding SR48 billion (US$12.79 billion) at the beginning of June.

Saudi Arabia in reality is way ahead in tapping the domestic sovereign Sukuk market, given that it has a well-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.