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SAUDI ARABIA: Projected to
experience a budget deficit greater than its estimations this year, the
Saudi Arabia government is expected to return to the debt capital market,
encouraging growth in the country's corporate Sukuk sector.
The recent decline in oil prices and rising government expenditure on
increased welfare spending has generated expectations that Saudi Arabia may
issue domestic sovereign debt this year for the first time since 2007.
According to industry reports, the Kingdom is estimated to witness a budget
deficit of between 17-20% of its GDP in 2015. Foreign reserves in May
dropped US$36 billion to US$708 billion over the preceding couple of months
(a 5% fall and the fastest rate on record). Although still having a cushion
of substantial external reserves, analysts expect that the rising fiscal
gap could warrant domestic borrowings as they do not anticipate any sharp
pullback in government spending.
“Much of this debt would probably be long term and would be bought by the
country's banks, which would consume some of the plentiful liquidity that
has helped make bank lending the primary source of funding for Saudi
corporates,” conveyed Fitch in a recent statement. Even without sovereign
issuance, lower oil prices may affect banks' lending appetite, which could
reduce the cost difference between loans and Sukuk or bonds for issuers.
“We believe corporates will largely maintain their capex programs and some
funding for these plans may therefore move to the Sukuk market.”
Sharing Fitch‘s sentiments, economists at the IMF (according to Gulf News)
also opined that the government will likely bridge its widening fiscal gap
by resorting to domestic borrowing in the near future. Saudi corporates are
seen to be more inclined to issue Sukuk than bonds due to the wider local
investor base for Sukuk and because some are restricted to Shariah
compliant borrowing by their own rules. This view is supported by the
absence of conventional corporate bond issues in Saudi Arabia since 2013,
while Sukuk issuance was US$7.8 billion in 2014.
Another factor that is likely to spur Saudi Arabia’s Sukuk volume in the
medium term is the Capital Market Authority's plan to reform the corporate
debt market, including measures to make regulatory approval of debt
products easier. While little detail is available, the authority has
reportedly said it will announce an initiative by the end of the year.
Nevertheless, a sharp recovery in oil prices is foreseen to reduce the
impetus for Sukuk issuance by reducing the potential for sovereign debt issuance.
The probability of the Saudi government resorting to debt to plug the
significant fiscal shortfalls provides a boost to the country’s Sukuk
market; with foreign investment access to securities listed on the Tadawul,
market players are optimistic that it would serve as a catalyst for Sukuk
trading in the country’s secondary market.
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