Moody’s: Saudi Arabia surpasses Malaysia at the top of the sukuk...

Moody’s credit rating agency confirmed that Saudi Arabia’s investment in developing the local government sukuk and bonds market is bearing fruit with doubling of financing needs, describing the Saudi sukuk market as deep and well-performing.
In a report, the agency stated that over the past three years, the Saudi government has developed from scratch a deeper domestic sukuk and bond market, and is increasingly well-functioning, which has allowed it to benefit from the growing domestic and international demand for fixed income assets in compliance with Islamic law.
The agency is likely that the Kingdom will overtake Malaysia for the year 2020, as it is the sovereign country with the largest stock of long-term government bonds due, and it is expected that its share of sukuk in the total government debt will rise to 45 percent, similar to Malaysia and the second after Sharjah.
She added that this, in turn, helped diversify its sources of financing compared to what was available during the oil price shock of 2015-2016 and eased liquidity pressures amid more than double government financing needs this year.
The agency indicated that Saudi Arabia, on September 17th, completed its usual monthly issuance under the government’s Saudi riyal sukuk program, bringing the volume of domestic sukuk issuance from the beginning of this year to date to 84 billion riyals ($ 22.4 billion), a significant increase of 45 Percent compared to the same period last year.
She indicated that in April 2017, the Kingdom issued the first international sovereign sukuk (multi-segment) worth nine billion dollars, and soon after, it established a local program for sukuk in local currency in July 2017, and by 2019 the sukuk share of the total Government funding to more than 50 percent, after it has historically relied on traditional borrowing and withdrawing financial reserves to meet its government financing needs.
She pointed out that during the same period, the Kingdom became the largest sovereign source of long-term sukuk, with total domestic and foreign sukuk issuances exceeding $ 61 billion during 2017-2019, overtaking Malaysia and Indonesia, which have been pioneers in exporting sovereign sukuk for more than a decade.
It stated that, as of the end of 2019, the kingdom had the second largest stock of long-term government sukuk outstanding and one of the largest shares of sukuk in total government debt.
The agency expects that half of the total financing this year will come from sukuk issuances, including those issued through the applicable domestic sukuk program, as well as private sukuk offering operations with independent government institutions.
As a result, the total government sukuk issuance is likely to nearly double this year to about $ 40 billion from $ 21 billion in 2019.
According to the agency, the domestic sukuk market allowed access to wider and more diversified sources of financing this year compared to what was available during the previous oil price shock in 2015-2016, when the government fulfilled its financing needs by withdrawing reserves ($ 173 billion) and combined international loans (ten billion dollars). Dollars) and traditional European bonds ($ 17.5 billion).
She noted that the domestic demand for sukuk was ultimately driven by retail demand for Sharia-compliant Islamic finance products, which in turn were responsible for the strong growth in demand for Islamic assets by local banks.
The agency stated that as of 2019, 77 percent of all bank loans in the kingdom were fully Sharia compliant. The strong domestic demand for sukuk was also highlighted by the government’s refinancing process in July 2020, in which the traditional near-maturity domestic bonds were refinanced into sukuk after a reverse investigation by local bondholders.
The government has taken advantage of this growth potential by consolidating all domestic issuances since 2017 under the Saudi riyal-denominated government sukuk program, which now accounts for around 85 percent of all existing government sukuk.
Since July 2017, the government has been a monthly issuer of government sukuk, including by regularly re-utilizing previous issues to boost liquidity.
To facilitate local issuance under the program and to further improve the liquidity of the sukuk market, in July 2018 the government established a program for the primary trader of local government sukuk. Moreover, in April 2019, the government lowered the minimum subscription size to 1,000 Saudi riyals ($ 267) from one million riyals ($ 266,666) to facilitate individual participation and allow mutual funds to establish dedicated government sukuk funds.
According to Moody’s, as a result, the liquidity of the local sukuk market has improved significantly over the past two years, with the increase in returns in trading domestic sukuk and bonds in the Saudi Stock Exchange (Tadawul) to about 70 billion riyals annually during the first eight months of 2020 from about Only ten billion riyals in 2019 and less than a billion riyals in 2018.
The government has also been able to significantly extend the periods in domestic sukuk issuances to a weighted average of about 17 years in 2019 from about six years in 2018, which reduced the risks of refinancing by extending the maturity of the total government debt.
Also, since 2019, it has issued sukuk for a period of up to 30 years, which currently represents about 15 percent of all existing domestic sukuk.
In August 2020, the Capital Markets Authority approved a decision allowing non-residents to directly invest in listed and unlisted local sukuk instruments, which – over time – will improve the liquidity of the secondary market by supporting the gradual expansion of the investor base in Saudi Arabia, especially when it becomes It is also possible to settle transactions in domestic sukuk through one of the major international central securities depositors.