A return to debt issuance by the Saudi Arabian government could encourage growth in the country’s corporate sukuk market, Fitch Ratings says.
Upcoming regulatory reform could also make sukuk more attractive for a corporate sector that has traditionally relied heavily on bank lending.
The recent decline in oil prices has sparked expectations that Saudi Arabia may issue domestic sovereign debt this year for the first time since 2007. 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.
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 programmes and some funding for these plans may therefore move to the sukuk market.
Sovereign debt issuance would create another benefit for potential corporate issuers by helping create a pricing benchmark. We believe Saudi corporates are more likely to issue sukuk than bonds because of the wider local investor base for sukuk and because some are restricted to sharia-compliant borrowing by their own rules. Regional and international investors are also increasingly happy to invest in sukuk.
This view is supported by the absence of conventional corporate bond issues in Saudi Arabia since 2013, while sukuk issuance was USD7.8bn in 2014.
Another factor that is likely to spur Saudi sukuk issuance 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. Little detail is available, but the authority has reportedly said it will announce an initiative by the end of the year.
The main factor likely to slow or limit sukuk growth is higher initial costs compared to other forms of borrowing. Sukuk are more expensive to issue than bonds due to their more complex structures, which need to be approved by a sharia board. Both are more expensive than bank lending. A sharp recovery in oil prices could also reduce the impetus for sukuk issuance by reducing the potential for sovereign debt issuance.