NDMC Continues its Sovereign Domestic Sukuk Issuance Momentum in October 2024 through a 5-Tranche Auction Raising SAR7.83bn (USD2.1bn) as Volume of Issuances Reaches a Staggering SAR64.50bn (US$15.12bn) in the First Ten Months Due to Strong Investor Demand
The National Debt Management Centre of the Saudi Ministry of Finance (MoF) continued its proactive sovereign Sukuk issuance momentum in the Saudi riyal-denominated domestic market with an auction on 24 October 2024 – its 10th consecutive monthly auction of the year under its published issuance calendar.
The issuance comes on the back of the conclusion of the latest IMF Consultation IV on Saudi Arabia in September 2024 in which the Fund’s Executive Directors commended The Kingdom for its ongoing economic transformation, underpinned by sustained efforts to diversify the economy under Vision 2030. They welcomed the robust non-oil economic activity, stable inflation, record-low unemployment, and ample fiscal and external buffers, while at the same time stressing the importance of maintaining fiscal prudence, safeguarding financial stability, and continuing to implement structural reforms to support sustainable and inclusive growth.
The Directors supported the recalibration of investment spending as it helped mitigate overheating risks. There have been concerns about the excessive allocations for the giga Neom City projects and the Kingdom’s capacity to absorb all these initiatives. “Making public the main impact of this exercise on Vision 2030 objectives would help provide clarity on government priorities and anchor investors’ expectations,” said the IMF.
The banking sector is on a strong footing. Stress tests performed by the Financial Sector Assessment Program (FSAP) show that banks as well as non-financial corporates are resilient to shocks, even under severe adverse scenarios. Despite recent moderation, bank credit growth—mainly to the corporate sector—continues to surpass deposit growth.
Against such a positive economic background, the NDMC raised an aggregate SAR7,829.56mn (USD2,084.66mn) in a five-tranche transaction comprising:
i) A 5-Year Tranche of SAR823.202mn (USD219.18mn) priced at a yield of 4.72% p.a. maturing in 2029.
ii) A 7-Year Tranche of SAR319.502mn (USD85.07mn) priced at a yield of 4.83% p.a. maturing in 2031.
iii) A 10-Year Tranche of 2,180.002mn (USD580.44mn) priced at a yield of 5.03% p.a. maturing in 2034.
iv) A 12-Year Tranche of 1,436.852mn (USD382.57mn) priced at a yield of 5.12% p.a. maturing in 2036.
v) A 15-Year Tranche of SAR3,070.002mn (USD817.40mn) priced at a yield of 5.24% p.a. maturing in 2039.
This compared with the previous auction on 17 September 2024 when the NDMC raised SAR2.603bn (USD690mn) in a six-tranche transaction.
The two standout features of the October transaction are the expanded list of tenors ranging from 3 years to 15 years for the last two auctions and the robust demand for the certificates from local and foreign investors. It is no secret that the NDMC is keen to gradually extend the tenors of the Sukuk up to 30 years to help build a yield curve for various maturities.
The bids received for the October auction totalled SAR8,349.56mn (USD2,223.11mn) against an allocated amount of SAR7,828.56mn (USD2,084.66mn). This follows the trend in the September auction when total bids reached SAR5,792.735mn (USD1,542.35mn) against an allocated SAR2.603bn (USD690mn).
The NDMC started 2024 where it had left off in 2023 with a robust issuance of Riyal-denominated Sukuk in the domestic market with ten consecutive monthly multi-tranche transactions in the first ten 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 local currency government securities.
This follows the extension in June 2024 by the Saudi Ministry of Finance and the NDMC of the local primary dealer network for the issuances, to include Albilad Investment Company, Al Jazira 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 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 aim is to widen the distribution network for the Sukuk and the reach of the international investor base for local currency Saudi issuances.
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.”
These issuances confirmed the NDMC 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 First Nine Months 2024 Exceed SAR48bn
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 ten months of 2024, the NDMC has raised an aggregate SAR56,667.44mn (US$15,099.30mn) through ten consecutive local currency auctions – well on its way to potentially exceed its issuance volume in 2023, given the need to finance the volatility of the 2024 budget deficit 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.
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.
The prospects for the Saudi Sukuk and bond market remain buoyant. In early September the Saudi Ministry of Investment announced updated investment rules will make it easier for foreign investors to invest in the Kingdom to attract more international investment by streamlining the process and creating a more investor-friendly environment. The ministry highlighted that the updated regulations which come into effect in January 2025 will eliminate the need for many licenses and prior approvals, as well as significantly reduce paperwork and bureaucratic hurdles.
The updated investment system, approved by the Saudi Council of Ministers, is a key pillar of the national investment strategy and aligns with Saudi Vision 2030, emphasizing the pivotal role of investment in achieving comprehensive development goals and diversifying the national economy’s resources.
Similarly, The Saudi MoF in its Pre-Budget Statement for Fiscal Year 2025 at end September 2024 estimates that total expenditures will reach SAR1,285bn, and total revenues will reach SAR1,184bn, recording a deficit of 2.3% of GDP. The statement noted that the Government will continue increasing strategic transformational spending to achieve economic diversification and sustainable growth.
According to the MoF, total revenues for FY 2025 are estimated to reach about SAR1,184bn, reaching SAR1,289bn in 2027. Total expenditures are estimated to reach SAR1,285bn, reaching SAR1,429bn in 2027. The statement confirmed that—considering economic developments in the Kingdom, and the implementation of several financial and economic initiatives, as well as the adoption of fiscal policies that contribute to enhancing the stability and sustainability of the state budget for FY 2025—the budget is expected to record a deficit of about 2.3% of GDP.
Rising Demand for SAH Savings Sukuk
In tandem with the Saudi Arabian Government SAR-denominated Sukuk Programme, the NDMC also oversees the Saudi Arabian Government Guaranteed SAH Retail Savings Sukuk launched by the Saudi MoF in February 2024.
The issuance under the programme seems to be gaining traction especially among younger and retail investors. According to the NDMC, the latest round of issuance of SAH Savings Sukuk closed on 8 October 2024. The results of the offer have still to be published. In the last auction SAH auction in August, the total volume of savings subscriptions reaching SAR959mn (US$255.71mn), attracting the participation of 37,000 savers – up by 2,000 on the inaugural SAH Sukuk in February 2024.
The October SAH Sukuk mature on 8 October 2025 and are priced at a fixed profit rate of 5.92%. The subscription window was done through digital channels of the participant financial institutions – the primary dealers and distributors.
The SAH Savings Sukuk product, which was launched by the Ministry of Finance and managed by the NDMC, is an initiative under the umbrella of the Financial Sector Development Programme’s initiatives (one of the Saudi Vision 2030 programs) aimed to increase the savings ratios among individuals by motivating them to allocate a portion of their income to savings on a periodic basis, in addition to increasing the supply of savings products, raising the awareness around financial literacy and the importance of savings and its benefits for future plans.
SAH Sukuk are reserved for Saudi citizens only, who are over the age of 18 years, provided the subscriber has an account with either SNB Capital, AlJazira Capital, Alinma Investment, SAB Invest or Al Rajhi Capital, the primary dealers and distribution channels. SAH Sukuk is the first subsidized savings product intended for individuals that is compatible with Shariah principles in the form of Sukuk. It comes under the aegis of the Saudi Ministry of Finance’s Local Trust Certificates Issuance Programme denominated in Saudi riyals.
The purpose of issuance of SAH Sukuk is to enhance the financial planning of the younger generation for the future and increasing individuals’ savings rates by motivating them to periodically deduct a portion of their income and allocate it to savings, in addition to increasing the supply of savings products.
Its key marketing drivers include Shariah compliance products which enjoy growing popularity and traction among Saudi youth, featuring a short-term tenor of 1-year, annual returns, easy subscription, no fees for subscribers, and no restrictions on redemption. The minimum subscription rate of SAH Sukuk is SAR1,000, which is equivalent to the nominal value, while the maximum subscription limit is SAR200,000 for the total number of issues per individual during the programme period.
The SAH Sukuk has the potential to become an exemplary retail Sukuk savings product – in terms of Issuer of Last Resort (the Saudi Government), Guarantor, Volume, Competitive Pricing, and Investors.
