JEDDAH — On 26 July, the Saudi Arabia (A1 stable) Ministry of Finance debt management office

announced the completion of its first sukuk issuance under the primary dealers program,

which was established for the distribution of local government sukuk securities. This issuance,

which totalled around SR3.5 billion ($925 million), is positive for the development of

Islamic debt capital markets in Saudi Arabia because it broadens the investor base for

government sukuk securities in the primary market and supports liquidity in the secondary

market, Moody’s Investors Service said in its comment on Thursday (Aug. 2, 201).

The Saudi government has been a regular issuer of Islamic bonds since the Ministry of

Finance established a Saudi riyal-denominated sukuk program last year (more than $20

billion of riyal-denominated sukuk have been issued since July 2017). However, this issuance

is the first under the newly launched primary-dealer scheme and more than 20 investors

from participating financial institutions and asset managers submitted bids through an

electronic platform for both their own books and on behalf of investors. Previously, the Saudi

government typically relied on banks and institutional investors' subscriptions to complete its

tap issuances.

In the new primary-dealer system, the Saudi debt management office appointed five local

banks to act as primary dealers for local government securities, namely National Commercial

Bank (A1 stable, baa11), Samba Financial Group (A1 stable, a2), Saudi British Bank (A1 stable,

a3), Bank Al-Jazira (A3 stable, baa3) and Alinma Bank. Under this agreement, the appointed

primary dealers purchase sukuk sold at auction directly from the government, and later

place these securities in the secondary market for final investors, acting as market makers for

government securities.

“We expect the primary-dealers scheme will develop the local government sukuk market,

and more generally, debt capital markets in Saudi Arabia, which is one objective in the

government’s Financial Sector Development Program under Vision 2030, its national plan

to reform the economy. We expect the primary dealers will also help the government build

stable demand for sukuk securities and foster a broader and more diversified investor base by

facilitating public access to sovereign debt.”

In addition, primary dealers acting as market makers will play a key role in stimulating the

secondary market trading activity and liquidity, ensuring efficient pricing of government

securities on an ongoing basis. In April 2018, the Saudi Capital Market Authority, the government’s financial regulatory authority, announced the Saudi stock exchange listing of riyal-denominated government debt

instruments, including both sukuk and bonds totaling more than SR200 billion ($50 billion), in an effort to enhance the ease of

trading these instruments in the secondary market.

Saudi Arabia has been the largest issuer of sukuk by value among Gulf Cooperation Council countries since 2017, raising around $9.5

billion of sukuk during the first seven months of 2018, and accounting for almost 55% of the region’s total sukuk issuance in that period. However, the government has largely driven issuance, accounting for around 85% of the sukuk supply in the country since the

beginning of the year, while corporate sukuk activity has remained limited to a handful of issuers. “Going forward, we expect more issues

and listings of government sukuk, which, along with the introduction of the primary-dealers scheme, will help develop the secondary

market and build a benchmark yield curve for local corporate issuers,” Moody’s report said. — SG