The National Debt Management Center at the Ministry of Finance announced the completion of receiving investors' requests for its domestic issuance for the month of October 2020, under the Kingdom's government Sukuk program in Saudi riyals, where the volume of issuance was set at a total amount of 270 million riyals.
The center explained that the issuances were divided into two tranches, with the first tranche amounting to 235 million riyals, so the final size of the tranche 782 million and 800 thousand riyals for Sukuk maturing in 2027, while the second tranche amounted to 35 million riyals, making the final size of the segment seven billion and 650 million riyals for Sukuk maturing in 2032.
Since July 2018, an auction methodology has been used that the IMF believes will give a degree of flexibility to the pricing mechanisms of new domestic issues. The July 2018 issue (seventh edition) saw the application of this methodology for the first time with debt instruments in the Kingdom, as Saudi Arabia uses the "Dutch auction", which is the same auction that the US Treasury uses when it sells its bonds.
With the help of one of the "Bloomberg" products for auction, the primary dealers were given a specific ceiling price above which they could not price so that the final pricing was at or below the same price ceiling.
The primary dealers were required to submit their subscription requests, as well as those of their clients.
This auction mechanism differs from the pricing methodology, which was used in the past and revolves around determining a specific pricing range (i.e., an upper limit, an average limit, and another lower bound) and asking them to price between this range, and then the final price is determined by the issuer.
The yield curve is defined as a line that determines the interest on debt instruments at a particular time in which the issuer possesses balanced creditworthiness, but it varies in terms of maturity, as there is, for example, an interest difference between Sukuk and bonds for five years and for 30 years.
The yield curve usually takes an upward trend, which is the natural curve, but it may be reversed if the yield on the shorter-term bonds is higher than the yield on their longer-term counterparts, and Saudi Arabia has a natural yield curve, whether with its local or hard currency-denominated issuances.
Since 2019, Saudi Arabia has succeeded in extending the maturities of Sukuk in the local market through new issues covering 12, 15, and 30 years, in order to complete the risk-free yield curve, which contributes to supporting various markets, including real estate debt markets.
The same thing was repeated in 2020 when it saw its dollar issuance of maturities of seven years and 12 years, for the first time a bracket of 35 years, all of which came during separate maturities, contributing at the same time to prolonging the period of those benefits, according to the state's public debt management policy.
And workers in fixed income markets use the measure of "return to maturity", in order to calculate the future return of a debt instrument if it is held until the time for it is amortized.
This measure determines the feasibility of investment or not, and this indicator is frequently used among investors to make comparisons between the annual returns of debt instruments, regardless of their maturities.
The issuance of this month is expected to support the stock of savings bonds available for individual investments in the secondary market. The decision to activate the reduction of the nominal value of the listed government Sukuk to be accessible to individuals, starting from June 2019. This means that Saudi Arabia has opened the way for its citizens to participate in supporting development projects in the country, in a progressive step in line with many countries around the world, What follows this approach.
The economic reforms that pervaded fixed income markets in Saudi Arabia contributed to making the issue of individuals investing in Sukuk possible after reducing the face value of the Sukuk to one thousand riyals, compared to one million riyals before that.
Developing from "scratch" pays off
The credit rating agency "Moody's" said in a report during the third quarter of 2020 that Saudi Arabia's investment in developing the local government bond and Sukuk market is paying off with doubling the 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 functioning well, which has allowed it to benefit from the growing domestic and international demand for fixed income assets that are compatible with Islamic law.
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 reduced the minimum subscription size to 1,000 riyals ($ 267) from one million riyals ($ 266,666) to facilitate individual participation and allow mutual funds to set up dedicated government Sukuk funds.
The government has also managed to significantly extend the periods in domestic Sukuk issuances to a weighted average of approximately 17 years in 2019 from about six years in 2018, which reduced the risks of refinancing by extending the total maturity of the government debt.
Slow down debt growth
The Saudi Ministry of Finance allowed its public debt to grow during the current year 2020 from what was planned due to the Corona crisis, for the sake of financial sustainability, which preserves the gains, ensures the continuity and sustainability of economic growth and progress, and provides basic requirements for citizens.
According to its preliminary data for the 2021 budget at the end of last September, the Ministry of Finance expected an increase in public debt in 2020 to 854 billion riyals, equivalent to 34.4 percent of GDP, compared to its prediction before the pandemic of 754 billion riyals, which would then constitute 26 percent.
The expected total debt for the current year 2020 is an increase of 26 percent from what it was in 2019, which amounted to 678 billion riyals at the time, an increase of 176 billion riyals.
But the finance targets a slowdown in the growth of public debt since the beginning of the next year 2021, as the debt in 2021 was estimated at 941 billion riyals (32.9 percent of GDP), with a growth of 10.2 percent over the previous year.
It also targets the volume of debt at 1.016 trillion riyals in 2022 (33.4 percent of output), with a growth of 8 percent over the previous year, then 1.029 trillion in 2023 (31.8 percent of output), and a growth of 1.3 percent from 2022.
This comes after the debt growth recorded 21.1 percent in 2019, about 26.3 percent in 2018, and 40 percent in 2017, while its growth in 2016 reached 122.5 percent.
Saudi Arabia had earlier amended the ceiling for public debt from 30 percent of GDP to 50 percent, and despite this, the Ministry of Finance expects not to reach the new ceiling in the medium term, as the ceiling was raised with the increase in the need for financing to face the repercussions. Pandemic.
Saudi finance allowed higher levels of the budget deficit in 2020 than it was planned before the Corona crisis, but the fiscal policy aims to gradually reduce deficit levels in the medium term to support the stable financial environment and stimulate investment.
Saudi Arabia will work to follow flexible policies that keep pace with local and international developments, which in turn contribute to mitigating the effects of this crisis and confronting it with a high level of efficiency.
Saudi Arabia will also continue to assess developments and take appropriate financial policies to raise financial performance and to ensure the sustainability of public finances in the medium and long term.
Expanding financing options
When a company touches the door of debt markets, this means that this company has reached an important stage of maturity and development, as it has expanded its financing options, thus bypassing the stage of its total dependence on bank loans.
Historically, there are no diversified financing channels for Saudi companies, due to their reliance on bank loans, as well as the stock market.
Economic Reports Unit