NDMC Continues its Sovereign Saudi Riyal Sukuk Issuance Momentum in July 2024 with Latest SAR4.414bn (US$1.176bn) Transaction as Primary Dealer Network is Expanded to Ten Local, and Five International Financial Institutions
The National Debt Management Centre (NDMC) of the Saudi Ministry of Finance (MoF) continued its sovereign paper issuance momentum in the Saudi riyal-denominated domestic market with a three-tranche auction on 27 June 2024 raising SAR4,414.002mn (US$1,176.79mn).
This follows the successful issuance of its seventh Sukuk offering in the international market at end May 2024 of US$5bn (SAR1,330.00mn), and the SAR64,100.00mn (US$17,089.88mn) transaction in the domestic market, conducted by the NDMC in May 2024 Sukuk issued as an occasional one-off offering to rebalance and manage the Government’s debt redemption and future issuance maturities profile. Indeed, on 30 May 2024 the NDMC completed an early purchase of a portion of the Issuer’s outstanding debt instruments maturing in 2024, 2025 and 2026 with a total value exceeded SAR63.1bn (US$16.82bn).
The NDMC successfully closed its sixth consecutive monthly domestic sovereign Sukuk issuance as per its annual issuance calendar on 27 June 2024 raising an aggregate SAR4,414.002m (US$1,176.79m) through three tranches – a 3-year tranche of SAR1,600.00mn (US$426.56mn) maturing on 26 July 2027 priced at a yield of 5.19 % per annum, having received bids totalling SAR1,777.014mn (US$473.76mn); a 7-year tranche of SAR53.002mn (US$14.13mn) maturing on 25 April 2031 and priced at a yield of 5.13 % per annum, having received bids totalling SAR53.002mn (US$14.13mn); and a 10-year tranche of SAR2,761.000mn (US$736.09mn) maturing on 18 January 2034 and priced at a yield of 5.26 % per annum, having received bids totalling SAR6,819.401mn (US$1,818.07mn).
This compared with the aggregate SAR3,231.50mn (US$861.56mn) raised by the NDMC in the May 2024 auction. The NDMC started 2024 where it had left off in 2023 with a robust issuance of Riyal-denominated Sukuk in the domestic market with six consecutive monthly multi-tranche transactions in the first six months to date, which were all fully subscribed by selected local and foreign institutional investors, suggesting a robust sustained trajectory of the issuance and demand for Saudi government securities. It is consistent with the issuance trend of 2023.
The fact that total bids received from investors for the three-tranche June 2024 issuance amounted to SAR8,649.417mn (US$2,305.96mn) suggests continued robust market demand from local and international institutional investors for local currency sovereign papers. In fact, in July 2024, the Ministry of Finance and the NDMC extended the local primary dealer network for the issuances, and signed agreements with Albilad Investment Company, AlJazira Capital Company, Al Rajhi Capital Company, Derayah Financial Company, and Saudi Fransi Capital appointing them as distribution primary dealers in the government’s local debt instruments. The institutions will join the other five local institutions, namely, the Saudi National Bank, the Saudi Awwal Bank (SAB), AlJazira Bank, Alinma Bank, and AlRajhi Bank, as well as the five new international institutions, namely, BNP Paribas, Citigroup, Goldman Sachs, J.P. Morgan, and Standard Chartered Bank.
The agreements, said the Ministry of Finance, confirm the role of the NDMC in enhancing and sustaining the access to local debt markets through diversifying the investor base. All applications for subscription in the primary market for the government’s local debt instruments are submitted to the NDMC through the appointed primary dealers on a scheduled monthly basis where these dealers receive the applications submitted by investors.
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 a statement, 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 considering market movements and the government debt portfolio risk management.”
Total Volume in 2024 Projected to Exceed 2023 Figure
In 2023, the total volume of funds raised by the Saudi Ministry of Finance through all sovereign Sukuk issuances reached a staggering SAR104.02bn (US$27.73bn), of which SAR81.51bn came through domestic Sukuk issuances.
Thus far in the first six months of 2024, the NDMC has already raised an aggregate SAR37,007.088mn (US$9,866.20mn) through five local currency auctions – well on its way to potentially exceed its issuance volume in 2023, given the need to finance the 2024 budget deficit (albeit modest) and the huge infrastructure funding requirements especially associated with the giga NEOM projects and issuance under its newly-launched Green Financing Framework (GFF) unveiled by the Saudi Ministry of Finance in March 2024.
“Saudi Arabia has established its Green Financing Framework in accordance with the Green Bond Principles 2022, as published by ICMA. Under this Framework, the Kingdom will be able to issue Green Bonds/Sukuk,” says the GFF document.
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.
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 (ECAs), 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.
A Flourishing Saudi Islamic Finance Market
In fact, these issuances come on the back of the latest Fitch Ratings ‘Saudi Islamic Finance Dashboard 2024’, which stressed that Saudi Islamic banks’ standalone credit profiles will remain strong in 2024 and 2025, supported by high oil prices and benign operating conditions.
“Strong credit growth will put some pressure on capital, funding, and liquidity. We expect the credit growth will also lead to banks further diversifying their funding bases through wholesale funding, including Sukuk issuance, which is becoming a bigger part of the funding mix – although we expect deposits will remain the main source of funding,” says Bashar Al-Natoor, Fitch’s Global Head of Islamic Finance.
Saudi Islamic banks are well-placed in the banking sector, with larger retail franchises supporting higher margins, a lower cost of funding, and better asset quality. In general, financing growth has outpaced lending over the past few years, supported by the requirement for residential mortgages to all be Sharia’a-compliant. Islamic banking is dominant in Saudi Arabia, with the largest proportion of Islamic financing (85%) of any country that allows conventional banks to operate alongside Islamic banks.
According to the dashboard, customer deposits formed 80% of Islamic banks’ funding at end-2023, compared to 84% for conventional banks. Islamic banks’ average financing/deposits ratio increased to 102% at end-2023 (end-2022: 99%) as their financing growth outpaced deposit growth. Deposit concentration is high, except at Al Rajhi Banking and Investment Corporation, which benefits from a granular retail deposit base.
“Despite tighter conditions, Islamic banks’ liquidity management is supported by the increasing availability of government Sukuk and liquidity-management tools from SAMA, the Saudi central bank,” concluded the authors.