“Local Sukuk” … a Saudi plan to support the budget and reduce expenditures


What is the latest sukuk offered by Saudi Arabia?

$ 788 million Sukuk maturity period of 2033.

What are the Kingdom’s motives for issuing local sukuk?

Reducing the budget deficit, slowing the growth of debt, and motivating individuals to invest.

What are the risks of these local instruments?

It does not have significant risks, especially with the possibility of a rise in oil prices.

The Saudi government continues to offer local sukuk to collect cash to help it cope with the great effects that the Corona pandemic has left on its economy, relying on the financial surpluses and large oil reserves it has.

And in a new step on the road to collecting liquidity through local sukuk, the Saudi Ministry of Finance announced, on Wednesday, January 20, the issuance of financial instruments in the local market worth 2.955 billion riyals ($ 788 million).

The ministry stated, in a statement, that the issue was divided into two tranches. The first one with a value of 2.075 billion riyals (553 million dollars) due in 2028, and the second with 880 million riyals (235 million dollars) due in 2033.

Reports indicate that these issuances support individuals’ investments in the secondary market, after activating the reduction in the face value of the listed government sukuk to be available to individuals, starting from June 2019.

With this step, Riyadh 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 that follow this approach.

The amendment of the laws contributed to making the issue of individuals investing in sukuk possible, after reducing the face value of the instrument to one thousand riyals ($ 266.56), compared to one million riyals before the reduction decision.

Fruitful transformation

In its report for the third quarter of 2020, the credit rating agency Moody’s said that Saudi Arabia’s investment in developing the local government bond and sukuk market is paying off with doubling of financing needs.

The agency described the Saudi sukuk market as deep and well-performing, and said that over the past three years, the Saudi government has developed the local sukuk and bond market, and is increasingly functioning well.

The agency pointed out that these sukuk allowed the Kingdom to benefit from the increasing domestic and international demand for fixed income assets that are compatible with Islamic law.

In order to facilitate local issuance under the program, and to further improve the liquidity of the sukuk market, the Kingdom established, in July 2018, a program for the primary trader of local government sukuk.

The government was able to extend the periods in issuing local sukuk for a period of up to 17 years in 2019, after it was six years.

This extension, according to Moody’s, reduced the risk of refinancing; By extending the overall maturity of the government debt.

To further expand this market, the Capital Markets Authority approved, in August 2020, a decision allowing non-residents to directly invest in listed and unlisted local sukuk instruments.

“Moody’s” classified the Saudi domestic sukuk issuance program with the highest investment grade rating, and the agency announced that it had classified the issuance of Saudi riyal-denominated sukuk on the local scale at AAA.

The Saudi Finance Minister, Muhammad bin Abdullah Al-Jadaan, affirmed that “this classification reflects the strength and resilience of the Kingdom’s economy, and its ability to face global economic challenges.”

Slow down debt and support the budget

In its 2021 budget data, issued in late September 2020, the Saudi Ministry of Finance expected an increase in public debt in 2020 to 854 billion riyals ($ 244 billion), equivalent to 34.4% of GDP, compared to its prediction before the pandemic, which was 754 billion riyals (215 Billion dollars), representing 26% of the GDP.

And Saudi Arabia had earlier amended the ceiling for public debt from 30% of GDP to 50%.

Despite this, the Ministry of Finance expects that the new ceiling will not be reached in the medium term, as the ceiling has been raised with the increase in the need for financing to face the repercussions of the pandemic.

The 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 the deficit levels in the medium term to support the stable financial environment and stimulate investment.

The Egyptian economist, Dr. Abd al-Nabi Abd al-Muttalib believes that “the move of local sukuk is good at the present time, as it relieves pressure on the Kingdom’s budget and reduces family spending by motivating individuals to buy sukuk instead of phones, cars or travel for tourism.”

Speaking to Al-Khaleej Online, Abdul-Muttalib said: “The issuance of local sukuk mitigates the economic effects of Corona on the Kingdom’s economy,” indicating that “the risks of these sukuk are very small with the possibility of an increase in oil prices.”

He added, “These sukuk will now contribute to financing the general budget, that is, they will reduce the deficit. Reducing family spending will also reduce the money that the Kingdom spends on importing because it is an importer country.”

It is noteworthy that the Public Debt Management Office at the Saudi Ministry of Finance decided, in 2016, to establish an international program to issue debt instruments, as part of the ministry’s endeavor to diversify financing methods and reduce pressure on domestic liquidity.

The decision also came to reduce the economy’s dependence on oil, especially after its prices witnessed a remarkable fluctuation in 2015, as it decreased to about $ 50 in 2015, compared to $ 115 in 2014.

During the Corona crisis, the Kingdom tried to benefit from its huge assets and strategic projects, issuing international bonds, and resorted to selling some non-core properties in Aramco for oil production. With the aim of providing cash.


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