Mohammed Khnifer, Debt Capital Markets Senior Associate at the Islamic Corporation for the Development of the Private Sector (ICD), explains emerging market investors should know when they unlock Saudi Arabia’s $54.5 billion government debt
Early April 2018, Saudi Arabia’s securities regulator announced that it had approved the listing of local currency government Sukuk and bonds on the Saudi Stock Exchange. The week after saw over SAR 204.4 billion ($54.5 billion) worth of government debt being traded on the local exchange.
This is a landmark move because we’re talking about $54.5 billion coming to the market in one go. It will enable, for the first time, qualified and approved foreign investors to purchase that debt at floating, fixed, as bond and Sukuk, as well as with different tenors. This will give emerging market debt investors access to this untapped local debt which has been closed off for several years. Local debt is becoming a trend in emerging markets and many investors plan to increase their exposure to local currency debt. This especially due to the fact that the SAR is pegged to the USD, therefore it is stabilised.
While listing will help develop an active yield curve, I caution that it will take time. The initial assumption that there will be active trading is something I doubt because no market makers and primary dealers have been assigned yet. Once these steps are taken, we should then see an active tradability, which will be positive as it will enable corporates to have a local and active reference benchmark. On the local level there is huge publicity and retail investors are excited and wondering if they could purchase the debt. Unfortunately, they will not be able to do so because the bonds are expensive. Each Sukuk unit will cost approximately SAR 1 million.
The listing and tradability of local currency bonds and Sukuk with a fixed rate could create the culture of pricing corporate bonds through a fixed rate instead of a floating rate. Most DCM deals are priced at floating rate—this is probably because the investor base are banks and they dictate the nature of the rate they are looking for and it will usually be in their favour when the local reference rate (SAIBOR) moves up—this is in turn a negative for corporates as it will affect their profits. The listing will create awareness of fixed rates as well as the pricing of bonds and Sukuk. Potential issuers will also have a local and active benchmark when it comes to fair price and this will raise awareness of credit ratings. Overall, this will have positive impact on the local debt market in Saudi Arabia and the wider emerging market space.