Saudi Arabia has successfully raised nearly SAR 8 billion (approximately $2.08 billion) through its latest multi-tranche sukuk offering, demonstrating the kingdom’s commitment to diversifying its funding sources and tapping into Islamic finance markets. The issuance, part of Saudi Arabia’s broader efforts to leverage sukuk (Islamic bonds) as a tool for capital generation, was denominated in Saudi riyals and divided into five tranches, each with varying maturities.

Breakdown of the Sukuk Tranches

The National Debt Management Centre (NDMC) announced the successful closure of the October 2024 issuance under the Saudi Arabian Government SAR-denominated Sukuk Program. The total allocation reached SAR 7.8 billion, or $2.08 billion, across five tranches:

1. First Tranche: Valued at SAR 823 million, this tranche is set to mature in 2029.
2. Second Tranche: This portion, valued at SAR 320 million, has a maturity date in 2031.
3. Third Tranche: Worth SAR 2.18 billion, it will mature in 2034.
4. Fourth Tranche: This tranche amounts to SAR 1.437 billion and is set to mature in 2036.
5. Fifth Tranche: The largest of the tranches, valued at SAR 3.07 billion, will mature in 2039.

This issuance underlines Saudi Arabia’s strategic use of sukuk to fund its long-term economic transformation under Vision 2030 while adhering to Islamic finance principles. The use of sukuk allows the kingdom to appeal to a broader base of investors, particularly those seeking Sharia-compliant investment options.

Sukuk in Saudi Arabia’s Economic Strategy

Saudi Arabia has increasingly turned to sukuk as part of its efforts to diversify the economy away from oil dependency, stabilize its fiscal position, and fund its ambitious development programs. Islamic finance, particularly through sukuk, has become an essential tool for the kingdom to raise capital while adhering to religious principles that prohibit the charging of interest.

In recent years, sukuk issuances have become an integral component of Saudi Arabia’s debt management strategy, enabling the government to finance large-scale infrastructure projects and other initiatives linked to the Vision 2030 reform program. The Vision 2030 initiative, launched by Crown Prince Mohammed bin Salman, aims to reduce Saudi Arabia’s reliance on oil revenue, boost private sector growth, and attract foreign investment. Sukuk offerings serve as a critical mechanism for mobilizing the funds needed to support these economic transformation efforts.

Global Sukuk Market Trends

Despite a decline in global sukuk issuance in 2023, due to tighter liquidity conditions in Saudi Arabia and a lower fiscal deficit in Indonesia, the sukuk market has rebounded this year. According to S&P Global Ratings, global sukuk issuances are forecast to reach between $160 billion and $170 billion by the end of 2024, following $168.4 billion in 2023 and $179.4 billion in 2022. This slight fluctuation reflects both cyclical market dynamics and the increasing role of Islamic finance in global capital markets.

S&P also reported that from January to June 2024, total sukuk issuance amounted to $91.9 billion, marginally higher than the $91.3 billion recorded during the same period in 2023. Notably, foreign currency sukuk issuances surged by 23.8%, reaching $32.7 billion, up from $26.4 billion in the first half of 2023. This trend points to the growing internationalization of sukuk, as more global investors seek Sharia-compliant financial instruments.

Key Drivers of Sukuk Demand

Several factors continue to drive demand for sukuk in Saudi Arabia and across the broader Middle East and North Africa (MENA) region. These include:

1. Rising Public Spending: Saudi Arabia’s substantial public spending on infrastructure and development projects has created a growing need for capital. Sukuk offers a cost-effective way to raise funds for these initiatives.
2. Diversification of Funding Sources: The Saudi government has been proactive in diversifying its funding sources, turning to both conventional bonds and sukuk to balance its debt portfolio. This strategy allows the government to tap into a wide range of investors, including both conventional and Islamic investors.
3. Favorable Regulatory Environment: Saudi Arabia has implemented regulatory reforms to encourage sukuk issuance, providing a conducive environment for both local and international investors. The establishment of the NDMC has also helped streamline the issuance process, making sukuk more accessible to a broader audience.
4. Environmental, Social, and Governance (ESG) Considerations: Sukuk has gained attention as an ideal instrument for funding environmentally sustainable and socially responsible projects. Saudi Arabia has been exploring the possibility of green sukuk, which would align with its sustainability goals under Vision 2030. The development of green sukuk markets, especially in the Middle East, offers potential for significant growth in the coming years, as countries seek to finance clean energy and other sustainability initiatives.

The Role of the National Debt Management Centre

Established in 2015, the National Debt Management Centre plays a crucial role in coordinating Saudi Arabia’s debt strategy, which includes the issuance of sukuk. The NDMC is tasked with managing the country’s debt portfolio, ensuring that the government’s financing needs are met efficiently and cost-effectively.

The center has been instrumental in establishing Saudi Arabia’s presence in both the domestic and international sukuk markets. By offering sukuk in multiple tranches with varying maturities, the NDMC is able to cater to a wide range of investors, from institutional investors seeking long-term returns to those looking for shorter-term investments.

Saudi Arabia’s Debt Outlook

Saudi Arabia’s debt has been steadily rising in recent years, primarily due to its ambitious infrastructure spending and economic diversification efforts. However, the kingdom remains committed to maintaining fiscal discipline while managing its debt levels. According to the IMF, Saudi Arabia’s public debt is expected to remain stable in the coming years, with the government continuing to rely on a mix of sukuk and conventional bonds to meet its financing needs.

In addition, Saudi Arabia’s robust credit rating, underpinned by its substantial oil reserves and prudent fiscal management, ensures that the kingdom remains an attractive destination for investors. Moody’s currently rates Saudi Arabia at “A1” with a stable outlook, citing the country’s strong fiscal position and commitment to economic reforms.

Conclusion

The successful issuance of SAR 7.8 billion ($2.08 billion) in sukuk by Saudi Arabia reflects the country’s strategic use of Islamic finance to meet its capital needs while adhering to Sharia principles. This latest offering is part of the kingdom’s broader efforts to finance its ambitious Vision 2030 goals, diversify its economy, and reduce its reliance on oil revenue.

As the global sukuk market continues to expand, Saudi Arabia is poised to remain a key player, offering attractive investment opportunities to both local and international investors. With favorable regulatory reforms, rising demand for Sharia-compliant financial instruments, and a growing focus on sustainability, the sukuk market in Saudi Arabia is likely to see continued growth in the years ahead.

In conclusion, Saudi Arabia’s October 2024 sukuk issuance marks a significant step in the kingdom’s ongoing efforts to leverage Islamic finance as a key driver of economic development and fiscal stability. As sukuk issuance continues to rise globally, Saudi Arabia remains at the forefront of this growing market, offering both local and international investors a compelling investment opportunity.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

24th October, 2024