• Saudi Arabia’s banks have enough liquidity to absorb the sudden revival of sovereign bond issuance
  • The bonds may have a slight effect on interest rate margins and the cost of lending

Saudi Arabia’s domestic banks have enough liquidity to absorb Riyadh’s bond issuance plans for 2015, according to analysts.

The Saudi government is expected to issue about SR20bn ($5bn) in sovereign bonds every month for the rest of the year.

The kingdom’s banking system is highly liquid and banks are welcoming the chance to invest their low-yield funds in government bonds.

“If liquidity is drying up, it will be slow and from a high base, so it is a long time before anyone will start getting worried,” says Redmond Ramsdale, director for financial institutions at London-based Fitch Ratings. “The banks can now invest in treasury bonds and government securities, which are highly rated, and pretty liquid and tradable.”

Sovereign bonds are expected to offer good returns for local banks and absorb some excess liquidity. Investing in government bonds will also help banks balance assets and liabilities, as they are seen as highly liquid assets.

Saudi Arabia’s Finance Ministry issued SR15bn of bonds in a private placement in July for the first time since 2007. Another SR20m of bonds were auctioned to banks in August with coupon rates of between 1.92 per cent and 2.65 per cent.

“There are some concerns around liquidity, and investing in sovereign bonds will affect banks’ feasibility and margins,” says a Dubai-based financial analyst. “For some banks, it will knock a few BIPs [basis points] off their NIMs [net interest margins], but for others it will be value accretive.”

The cost of lending on the Saudi market could rise slightly as the bonds soak up banks’ liquidity and they compete less to offer credit. But if the kingdom’s GDP growth slows to just 2.8 per cent this year, as the IMF predicts, this will reduce pressure on liquidity as loan growth slows.

From early 2016, Riyadh may look to international markets for its bond issuances. But liquidity will be less of a concern than maintaining diverse asset portfolios.

“The next step could be a more broad-based issuance,” says the analyst. “They may reach a point towards the end of the issuance cycle when they feel Saudi bank assets are too concentrated in government debt.”

This would allow global and regional investors to invest in highly rated Saudi sovereign bonds.

Riyadh may also issue sukuk (Islamic bonds) in late 2015 to tap the growing Islamic finance sector.

Stay informed with the latest in the Middle East
Download the MEED app today, available on Apple and Android devices