Saudi Arabia plans riyal-denominated Islamic bonds

The kingdom is turning to fixed income as it vies to meet a shortfall in revenue because of lower oil prices

Saudi Arabia has rolled out 142 stimulus initiatives with a total value of 214 billion Saudi riyals to support individuals, private sector businesses and investors since the outbreak of coronavirus. RShow more

Saudi Arabia's government made its first offer of riyal-denominated Islamic bonds to investors on Sunday, auctioning sukuk with maturities of five, seven and 10 years, a document seen by Reuters showed.

Riyadh is launching a domestic sukuk issuance programme to help cover a large budget deficit caused by low oil prices.

Five-year sukuk were offered at yields in a range of 2.90 to 3.00 percent, seven-year at 3.25-3.35 per cent, and 10-year at 3.55-3.65 pe rcent. Investors have until 2pm local time on Monday to submit bids.

The ministry did not give the amount of sukuk that it aimed to sell, but Saudi commercial bankers said they expected an issue of about 10 billion Saudi riyals (Dh9.79bn), which the market could cope with easily since liquidity had improved since last year and investors had been preparing for the issue.

Saudi Arabia’s ministry of finance said earlier on Sunday it has launched an “unlimited” programme for selling Saudi riyal-denominated sukuk, or Islamic bonds, as the kingdom steps up efforts to plug its budget shortfall caused by lower oil prices.

“The terms and conditions of each issuance will set out the details of such issuance including, but not limited to, the types of eligible investors, the size of the issuance and the expected return,” the ministry said on its website.

The ministry also plans to list the sukuk locally and has submitted the sukuk programme to market regulator, the Capital Market Authority, for approval, and to help to develop the local domestic debt market.

The ministry revealed earlier this month the names of 13 local banks that have qualified to take part in the sukuk programme.

In April, Saudi Arabia sold thi syear US$9bn worth of international sukuk, its first foreign sale of Islamic bonds.

The Saudi government put on hold in October last year the sale of domestic conventional bonds after it sold $17.5bn international bond, the biggest by an emerging market nation.

Prior to the international sale, the government was selling 20bn riyals (Dh19.6bn) of bonds to banks each month since mid-2015 to help finance its budget deficit.

The government is forecasting a budget deficit of 198bn riyals for 2017, compared with an actual deficit of 300bn riyals last year.

S&P Global Ratings expects sukuk sales this year to range between $75bn and $80bn, higher than its previous estimate of $60bn to $65bn, as more governments tap the fixed income market for their funding needs. This year’s sales will be exceptional and are unlikely to be repeated next year, the agency said.

Governments, which last year primarily tapped conventional debt markets, are seeking to diversify their investors’ base this year with sukuk sales.

The rating agency forecast that Arabian Gulf governments’ financing needs will reach $275bn between this year and 2019. About 50 per cent of that figure will be met from fixed income markets issuances, with a preference for conventional bonds over sukuk, it added.

With Reuters