The Saudi government’s domestic borrowing costs are achieving record declines for...

The returns of debt instruments of the Saudi government in the local market on all terms of maturity “four years to 30 years” by the end of the third quarter of this year, to the lowest level ever, with local investors moving away from risky assets and increasing demand for safe havens.
Four of the ten maturities have achieved reductions in their returns by more than a third as the sovereign issuances turn into the most important safe investment havens in the local market, and thus savings sukuk become the most important safe havens that have surfaced in recent times.
The five-year and five-month savings sukuk recorded the lowest return ever among all the 39 issuances, during their offering in the third quarter after the yield reached 1.43 percent, in the largest index of fixed-income market borrowers from Saudi companies, what This indicates the low cost of financing, by virtue of the entry of “pricing references” for government issuances with the pricing system for fixed-interest debt instruments for private sector enterprise issuances.
A survey by Al-Eqtisadiah showed that achieving the cost of local borrowing for the Saudi government showed record declines in the state treasury, as the size of the decline in the annual distribution return to investors ranged between 6.9 and 55.4 percent compared to the highest recorded return for each maturity. Period of time”.
This is the first time that the rate of decline in the yield of the seven sukuk exceeds the barrier of 55 percent compared to the highest return recorded in 2018, and thus the local market for fixed income markets, which did not exist before 2006, becomes a financing tributary that the government can rely on at the time. In which financing costs increased for all countries that borrowed from international markets after the outbreak of the pandemic during the first quarter.
While monitoring the economic reports unit in Al-Eqtisadiah indicates that nine maturities out of ten for government issuance have achieved the lowest return ever in six years, that is, since the launch of the bond and sukuk program denominated in riyals.
In fact, the wave of low returns affected the two newest issuances in the third quarter of this year, when the declines ranged between 6.9 and 8.5 per cent for the quadruple and eight sukuk, compared to the highest maturity yield.
The domestic decline in revenues coincides with what is happening in global fixed income markets, with the tendency of central banks to reduce the interest rate and apply unprecedented monetary stimuli to limit the economic repercussions of the Corona virus.
It is noteworthy that, last July, Riyadh issued four new proposals in one go, and included maturities that were offered for the first time in the history of Saudi Arabia as a tranches of four and eight years.
Al-Eqtisadiah monitoring showed that Saudi Arabia has become the only Gulf country that has sukuk issuances spread over ten maturities, with a “debt instrument term from four years to 30 years”, with an active yield curve supported by secondary trading of listed securities.
Although the number of “existing and listed” government bonds denominated in riyals reached 30 issues during 2015 and 2016, some of them have not yet been listed on the local stock exchange. While this year witnessed the maturity of the five-year bonds.Yield variation for domestic issues

Government issuances are distinguished by the fact that they passed two periods in terms of yield, within six years. The first was when the Saudi Arabian Monetary Agency “SAMA” took over the issuance of government bonds between the period from 2015 to 2016, which was marked by the near rate of return on the issues.
In contrast to the bonds that were of variable interest, which follow the movement of SIBOR, fixed-interest bonds were offered as a new monthly issuance without reopening old issues, as the return on September 2016 bonds reached between 1.81 and 2.50 percent for the tranches between Five to ten years.
There are no accurate statistics on the value of sovereign debt instruments owned by banks and government agencies, in both sukuk and bonds. However, the closest report that touched upon this part is the report issued by Moody’s in October 2018, which stated that Saudi banks are investing their surplus liquidity in high-return government investments, meaning sukuk, after these investments accounted for 12 in Percent of the total assets of banks at the end of June 2018, compared to 8 percent at the end of 2016.

Performance evaluation

Those working in fixed income markets use the YTM measure of “return to maturity” in order to calculate the future return of a debt instrument if it is held until it is amortized.
This measure determines the feasibility of investment or not. This indicator is frequently used among investors to make comparisons between the annual returns of debt instruments, regardless of their maturities.

Four year sukuk

The first appearance of the quadruple sukuk was in July 2020, when this tranche recorded the lowest “return to maturity” with the September offering of this year, when the yield reached 1.50 percent. Al-Eqtisadiah monitored that the amount of the decline percentage compared to the highest historical return for this segment has now reached 8.5%.

Five-year instruments

With a final return of 2.03 per cent, the five-year bond segment recorded, with the launch of August 2019 the lowest “yield to maturity”, and it comes with the reopening of the issuance, since the introduction of the government sukuk issuance program in mid-2017.
The monitoring of Al-Eqtisadiah newspaper showed that the percentage of decrease in the “return to maturity” rate compared to the highest historical return for this segment has now reached 44.8%. Knowing that the five-year bonds of the Saudi government that were made in the local market during October 2015 maintain the record for the lowest return, which is 1.70 percent.

5 year and 5 month bonds

As for the five-year and five-month tranche that was first launched in October 2019, the lowest “return to maturity” of the old issue that reopened in July 2020 was 1.43 percent.
This return is the lowest in six years for the same segment. The monitoring of Al-Eqtisadiah newspaper indicated that the percentage of decrease in the “return to maturity” rate compared to the highest historical return for this segment reached 35.8%.

Seven instruments

The yield to maturity of the seven sukuk was 1.73 per cent, with the issuance that opened in July 2020. This yield is the lowest in six years of the same category, with the highest return from the seventh sukuk segment reaching 3.88 per cent. It was registered with the October 2018 offering, according to the historical data of the Economic Reports Unit.
That is, the strategy of “reopening the issuance” brought with it decreases of 55.4 percent, when comparing the highest and lowest returns.

8 year sukuk

The first appearance of the eight sukuk was in July 2020, when this tranche recorded the lowest “return to maturity” with the September offering of this year, when the yield reached 2.13 percent.
A monitoring of Al-Eqtisadiah newspaper showed that the percentage of decline compared to the highest historical return for this segment has now reached 6.9 percent.

Decimal instruments

The yields of the decimal sukuk have recorded their lowest historical “return to maturity” since the start of the government sukuk issuance program, after the “return to maturity” of the decimal sukuk “re-opening a previous issue” reached 2.45 percent with the launch of August 2019 This yield is the lowest in six years for the same segment.
Al-Eqtisadiah newspaper monitored that the amount of the decline percentage compared to the highest historical return for this segment now stands at 39.6%.

Slide 10 years and 5 months

As for the 10-year and five-month tranche that was first launched in October 2019, the lowest “return to maturity” of the old issue that reopened in June 2020 reached 2.26 percent.
This return is the lowest in six years for the same segment. The monitoring of Al-Eqtisadiah newspaper indicated that the rate of decline in the “return to maturity” rate compared to the highest historical return for this segment, which reached 20.1 percent.

Slide of 12 years

The yield of the 12-year tranche, which was first introduced in February 2019, was 4.10 per cent, and the “yield to maturity” of the old issue that reopened in September 2020 was 2.75 percent. This return is the lowest in six years for the same segment.
The monitoring of Al-Eqtisadiah newspaper showed that the percentage of decrease in the “return to maturity” rate compared to the highest historical return for this segment reached 32.9%.

Slide 15 years

Despite the existence of three outstanding issues of 15-year-maturity sukuk that were launched in the current and last years, the issue that reopened in June 2020 “with a return to maturity of 2.69 percent” is still the lowest ever during Six years of the same category. Al-Eqtisadiah newspaper monitored that the percentage of decline compared to the highest historical return for this segment has now reached 32.9 percent.

Thirty instruments

As for the terms of the sukuk that are most in demand among investors, they are the thirty sukuk that have two outstanding issues, which were launched in the current and last years.
This year, the yield with the issue launched in March 2020 has fallen to 3.68 percent. This return is the lowest in six years for the same segment. The monitoring of Al-Eqtisadiah newspaper showed that the percentage of the decrease compared to the highest return recorded is 20.6%.

A long-awaited savings product

A historical comparison of the gradual path of debt market development leads to the fact that sovereign issuers wait to issue individual bonds until the financial literacy is sufficient to encourage this type of investment.
The period of readiness varies from one market to another. For example, the first sukuk offered worldwide was in 1990 by the Malaysian branch of the oil company, Shell. Whereas, the first individuals’ sukuk were issued in the country whose capital is Kuala Lumpur was in 2013. That is, Malaysia waited 23 years for the individual sukuk to be presented to its citizens, after the individuals were saturated with the necessary financial education.
The historical data of Al-Eqtisadiah shows that the date of the first riyal-denominated sukuk in the history of Saudi Arabia dates back to July 2006 by SABIC, and the nominal value of the three billion riyal issuance amounted to 50 thousand riyals for each instrument, meaning that Saudi Arabia has waited 13 years in order to offer individual bonds to its citizens.
This means an approximate shortcut to half the time it took Malaysia, a pioneer in the Islamic fixed income market, before offering the “infrastructure projects” sukuk to its citizens in order to finance these projects, bearing in mind that the issuances that came before 2006, specifically in 2004 were dollar sukuk issued. It is an international multilateral institution based in Jeddah, which is owned by more than 55 countries.

Economic Reports Unit