Saudi to issue riyal sukuk early 2012
Dubai, December 12, 2011
Saudi Arabia is in talks with banks about issuing a riyal-denominated Islamic bond, or sukuk, five banking sources said.
High-level discussions are currently ongoing between the Saudi Arabian Monetary Agency (Sama) and a number of local and international banks with operations in the kingdom regarding the details, the sources said, with an issue expected as early as the first quarter of next year.
The sukuk will not be issued directly by the government but will instead be marketed by either a governmental agency or a state fund, three of the sources said.
"Saudi Arabia has been preparing for this for over 12 months," a source involved in the process said, speaking on condition of anonymity due to the sensitivity of the matter.
"The infrastructure is there, I mean in terms of analysis, market research, risk assessment. They're talking with banks on different options so it's just a matter of time."
The discussions with banks are centred on the technicals of the issue, such as the tenor and whether the sukuk will carry a fixed or floating profit rate, a banker in the kingdom said. Sama, the country's central bank, was not immediately available for comment.
While quasi-sovereign names have appeared in the local bond market in recent years, such as Saudi Basic Industries Corp.
and Saudi Electricity Company, the Saudi sovereign has not issued debt for many years.
Government debt was seen by the authorities as a major problem in the late 1990s, when it was around 120 percent of GDP, and this has left a lasting impact, said Paul Gamble, head of research at Jadwa Investment.
"There has been an aversion to issuing debt," he said.
"There is a strong constituency here that thinks there should be no debt at all. Therefore, it would be a departure for the government to issue."
Gross public debt in Saudi Arabia will fall to as low as 7.1 percent of GDP this year from 9.9 percent last year, according to International Monetary Fund projections.
However, while the government doesn't need the cash, bankers say the corporate market is being hampered by the lack of sovereign benchmark to price off.
"It's very important as whenever we take a company to market, there are issues as there is no benchmark," a debt capital markets banker in the kingdom said.
"The lack of suitable government benchmarks has been an issue for a while, so a series of sukuk would be very helpful for the private sector," Gamble said.
"There are several sukuk from Sabic and SEC but there is very little secondary trading in them as banks tend to hold them until maturity, so they do not provide the best guide to market conditions."
In October, Saudi Finance Minister Ibrahim Alassaf told Reuters that the government was considering the issue of Islamic or conventional bonds to fund specific projects, with the offerings being backed by the government.
The Saudi Civil Aviation Authority (GACA) will issue a riyal-denominated sukuk in the next two months, Prince Fahd bin Abdullah, president of GACA, told Al Arabiya on Sunday. However, this will be separate to the Islamic bond plans of the sovereign, two of the sources said. - Reuters