The local offering of Saudi savings bonds for the month of June, amounting to 8.2 billion riyals, contributed to raising the total debt portfolio from the local market to 37.2 billion riyals during the first half of this year.
But the proportion of what the Saudi government collected from the fixed income markets during the current year is about 20 percent less than the same period last year, during which it collected 46.5 billion riyals, and 6.2 percent less than what it collected in the first half of 2019 of 39.7 billion. Rial.
According to the monitoring of the reports unit in the newspaper “Al-Iqtisadiah”, which was based on comparing the total public issuances available with their data, the decrease in the percentage of total financing from the domestic and international market during the first half, with the rise in oil prices by more than $70 per barrel, which was enhanced by the prospects for the growth of the Saudi economy before Global Experience Houses.
Saudi Arabia returned to its local debt markets with the second largest monthly issuance of this year, with the offering of three tranches of government securities, which was closed in the past 24 hours.
And Saudi Arabia received a strong demand from investors during an auction to sell three tranches of savings bonds, in the context of declining returns on debt instruments denominated in local currencies around the world, with central banks heading to reduce the interest rate and applying unprecedented monetary stimulus to reduce the repercussions of the Corona virus.
Al-Eqtisadiah learned that during the auction, the investors bought all the units of the sukuk offered for seven years and 15 years (both re-opening for previous issues), and a “new” issuance of decimal sukuk, in a sign of the keenness of fixed-income investors to obtain part of those securities with High creditworthiness.
Regarding the performance of the Saudi debt market so far, the managers of the IBOX indexes for fixed income instruments indicated that the trading movement is linked to the movement of US Treasury bonds.
He told the Economist, Sebastian Meyer and Karim Henned of IHS Market for Financial Services, that “since late 2020, the yield curve for debt instruments from 5 to 15 years has been rising, according to the return movement, in conjunction with what is happening in the markets.” Globally due to the change in the direction of the movement of US Treasury yields in the second quarter of 2020.
On the other hand, recent financial data indicated that Saudi issuers collectively acquired 20.4 percent of the total Gulf region issuances by the end of the first four months of this year.
These data indicated that Saudi issuers had issued up to $6.9 billion in bonds and sukuk by the end of April, taking advantage of the issuance windows, which were available to them in light of the fluctuations in the prices of US treasury returns.
According to Bond e Value financial data, the total amount issued by the Gulf issuers amounted to $33.7 billion in debt instruments at the end of April, and the share of Saudi issuers is expected to rise by the end of the first half.
While the platform “REDD”, which specializes in in-depth analysis of fixed income instruments in emerging markets, sees that thanks to the issuance of Aramco’s $6 billion dollar sukuk, the Gulf region accounts for 36 percent of the total issuance of debt instruments coming from “East and Central” Europe, Middle East and Africa”, since the beginning of the year until now.Issuance returns
The June issue, which is being settled on Thursday, was divided into three tranches with a “return to maturity” of seven-year sukuk at 2.07%, according to the issue price in the secondary market at 993 riyals.
While the “return to maturity” of the 15-year sukuk was 2.89 percent, according to its trading price in the secondary market at 1024 riyals, and the return for the new issuance of the decimal sukuk came at 2.60 percent.
The seven-year sukuk, which reopened this month, was first issued in January 2021, and the 15-year sukuk was issued in July 2020, according to Cbonds financial data platform.
The Ministry of Finance stated in a statement that the National Center for Debt Management has completed receiving investor requests for its local issuance for the month of June 2021 under the Saudi government’s riyal sukuk program, where the issue size was set at a total amount of SR8.265 billion.
The issues were divided into three tranches, the first amounting to 2.755 billion riyals for sukuk maturing in 2028, while the second tranche amounted to 4.650 billion riyals for sukuk maturing in 2031, and the third tranche amounted to 860 million riyals for sukuk maturing in 2035.
Monthly issue and sukuk prices
The newspaper’s monitoring showed that most of the savings bonds moved in the secondary market during the auction period, with the majority of the prices of the listed bonds’ values rising.
While the 2050 sukuk rose by 0.22 percent to 994 riyals with a return of 3.68 percent, there was a slight change in the price of the sukuks, which are due in 2027 with a return of 1.73 percent, which were trading during the offering period at 1034 riyals, according to Bond eValue financial data for price tracking of fixed income instruments.
While the decimal sukuk, which expires in 2029, maintained its price levels before the monthly offering, after stabilizing at the levels of 1110 riyals.
The EMU’s monitoring was based on bondevalue data, which offers investors the advantage of detecting offers and bids for bonds, in their portfolios in order to control the investment decision of the security.
Since July 2018, the auction methodology has been used, which the IMF believes will give a degree of flexibility to the pricing mechanisms of new domestic issues.
The July 2018 issue of the seventh edition saw the application of this methodology for the first time with debt instruments in the Kingdom, where Saudi Arabia uses the “Dutch Auction”, which is the same auction that the US Treasury uses when it sells its bonds.
Using one of Bloomberg’s auction products, the initial dealers were given a “cap price” that they could not price cap, so that the “final pricing” was at or below the same level as the price cap, and the initial dealers were asked to submit their subscription applications. , as well as their clients.
This auction mechanism differs from the pricing methodology, which was used previously, and revolves around setting a specific pricing range (ie an upper limit, an average and a lower limit), asking them to price between that range and then the final price being determined by the issuer.
The yield curve is defined as a line that determines the interest on debt instruments at a specific time when the issuer has a balanced creditworthiness, but is differentiated in terms of maturity, as there is, for example, an interest differential between sukuk and bonds for five years and for a term of 30 years.
The yield curve usually takes an upward direction and is the normal curve, but when it inverts, the yield on shorter-term bonds is higher than the yield on their longer-term counterparts. Saudi Arabia has a normal yield curve, whether with its local or hard currency-denominated issuances.
Since 2019, Saudi Arabia has succeeded in extending the maturities of the sukuk in the local market through new issues that include 12, 15 and 30 years, in order to complete the risk-free yield curve, which contributes to supporting various markets, including the real estate debt markets.
The same thing was repeated in 2020, when its dollar issuance witnessed maturities of seven and 12 years, and for the first time the 35-year segment, all of which came during divergent maturities, contributing at the same time to extending the term of those benefits, in accordance with the policy of the state’s public debt management.
Those working in the fixed income markets use the “return to maturity” measure, in order to calculate the future return of the debt instrument, in the event that it is held until the date of its amortization.
This measure determines the extent to which the investment is feasible or not. This indicator is frequently used among investors in order to make comparisons between the annual returns of debt instruments, regardless of their maturity dates.
It is expected that this month’s issuance will 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 sukuks to be accessible to individuals, starting from June 2019, 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, which follow This approach.
The economic reforms that pervaded the fixed income markets in the Kingdom made it possible for individuals to invest in sukuk after the nominal value of the sukuk was reduced to one thousand riyals, compared to one million riyals previously.
The value of public issues, the data of which is available, that mature this year amounted to up to 23.8 billion riyals, of which 3.1 billion riyals at the end of May of this year, whose maturity date has come from debt instruments in the local currency.
The sources of funding, which are due, varied between development bonds, government development murabahas, and the issuance of one dollar of five-year bonds.
Thus, the dollar issue remains at a value of 5.5 billion dollars, which is due to mature in next October, according to the “Cbonds” financial data platform.
This issue is considered distinct, because it was among the first Saudi issuances of international bonds in 2016, which were warmly welcomed by foreign investors. The Economic Reports Unit’s monitoring of maturity dates was based on data obtained from the FactSet platform for financial services.
It is noteworthy that “Facttest” has one of the most famous financial analytics platforms, which the global investment community uses to evaluate securities and build investment decisions.
The Saudi public debt rose during the first quarter of this year by about 5.6 percent, recording the highest growth rate since the second quarter of last year, which was increased by the repercussions of the pandemic.
The volume of public debt at the end of the first quarter of 2021 amounted to about 901.4 billion riyals (240.4 billion dollars), with a growth rate of 5.6 percent, compared to the end of the fourth quarter of last year, which amounted to about 853.5 billion riyals, while the debt recorded a growth of 24.6 percent. , compared to the same period of 2020, which amounted to 723.46 billion riyals.
The rise in the debt comes despite the fact that the budget for the first quarter of this year recorded the lowest deficit since the third quarter of 2018, as the deficit amounted to 7.44 billion riyals, after the decline in oil revenues by 9 percent on an annual basis, despite the growth of non-oil revenues.
Saudi Arabia was able to raise funds to pay its deficit of about 29.55 billion riyals, which exceeds the actual deficit for the first quarter, as it intends to use the rest of the funding to pay the deficit, for the remainder of the year. It is clear that Saudi Arabia is trying to take advantage of low interest in the debt markets.
Saudi Arabia did not use its reserves or current account to fill the deficit, which is the first time that it has not used these two accounts since the third quarter of 2019, when one of the two accounts was usually used to pay the deficit.
According to the monitoring, the volume of debt to GDP increased to 35.6 percent at the end of the first quarter of this year, compared to the end of last year at 32.3 percent, based on GDP at constant prices.
Development from “scratch” pays off
In early May 2021, Standard & Poor’s credit rating agency expected a strong growth of debt and capital markets in Saudi Arabia to finance investments of about 12 trillion riyals in the framework of “Vision 2030”. The agency pointed out that pegging the Saudi riyal exchange rate to the dollar helps to attract foreign investors, who are looking for returns in an economic environment characterized by low interest rates.
The agency expected that the dollar would remain the most preferred currency for debt issuances, but with a gradual increase in issuances in riyals in light of the development of the local market, and it is likely that the gradual increase in the depth of the local capital market will lead to increased levels of transparency and governance in Saudi Arabia in the coming years.
The agency pointed out that corporate debt markets are lagging, compared to other major markets worldwide. According to agency estimates, the total percentage of maturing bonds and sukuk issued by Saudi banks and companies, as on May 2, 2021, is slightly less than 10 percent of the country’s GDP at the end of 2020.
In contrast, the agency estimates this percentage at about 25 percent for Brazil, Russia and India, and about 50 percent for the 20 largest economies in the world, according to Bloomberg data.
And the credit rating agency, “Moody’s”, had stated in a report during the third quarter of 2020, that Saudi Arabia’s investment in developing the sukuk market and local government bonds is bearing fruit with the doubling of financing needs, describing the Saudi sukuk market as deep and well-performing.
The agency explained in a report that over the past three years, the Saudi government has developed from scratch a deeper domestic sukuk and bond market, and is increasingly doing well, allowing it to benefit from the growing domestic and international demand for fixed income assets that comply with Islamic law.
To facilitate local issuance under the program and to further improve the liquidity of the sukuk market, the government established in July 2018 a local government sukuk primary trader program. Furthermore, in April 2019, the government lowered the minimum subscription size to 1,000 Saudi riyals ($267) from 1 million riyals ($26,666) to facilitate the participation of individuals and allow mutual funds to create dedicated government sukuk funds.
Economic Reporting Unit