• A sovereign bond issuance by Saudi Arabia would stimulate corporate sukuk markets, according to London’s Fitch Ratings
  • Bank liquidity would be tightened, leading companies to turn to debt markets for financing needs

Sovereign bond issuances by Saudi Arabia’s government, announced for 2015, will encourage growth in corporate sukuk, according to London-based Fitch Ratings.

Saudi Arabia is likely to issue debt this year to cover its budget deficit and reduce pressure on reserve funds, which it drew down by $49bn in the first four months of 2015.

Saudi Arabia has not issued debt since 2007, thanks to high oil prices allowing budget surpluses. The Washington-based IMF expects a fiscal deficit of about 20 per cent of GDP in 2015.

“It’s a good way for banks to invest and for Sama [Saudi Arabian Monetary Agency] to control liquidity,” says Fahd al-Turki, chief economist and head of research at the local Jadwa Investment. “And low interest rates globally are attractive.”

Long-term sovereign debt would probably be bought up by banks, reducing the liquidity available for corporate loans.

Corporates would then be more likely to turn to debt markets to maintain their capital expenditure levels. Sukuk issuances in Saudi Arabia reached $7.8bn in 2014, according to the Fitch report.

“Local banks are the main providers of loans to corporates, but as banks take up sovereign bonds, liquidity will become more precious,” Bashar al-Natoor, director and global head of Islamic finance at Fitch tells MEED. “Companies might need to issue their own bonds rather than relying on short-term financing from banks.”

Sovereign sukuk would also set benchmark pricing and deepen yield curves, making corporate sukuk a more attractive option.

“This will stimulate the corporate bond market,” agrees Al-Turki. “It will add an important financial infrastructure element by building the yield curve, which is necessary for the development of the debt capital market in the kingdom.”

However, issuing sukuk is expensive due to their complex structure. The CMA is considering reform of debt markets to make approval easier and encourage issuances. It hopes to issue an initiative by the end of 2015, to be implemented by 2019.

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