Saudi Arabia expected to see a surge in bond issues

The issue of bonds in Saudi Arabia is expected to boom in the coming period following the creation of a formal debt market and tightening bank credit to the private sector, the kingdom's largest bank said yesterday. The National Commercial Bank (NCB) said the issuance of conventional and Islamic bonds (sukuk) has so far been limited to two government-controlled companies since the kingdom launched the bond market last month. It said the creation of the region's first official bond market was part of what it described as ongoing reforms to "further deepen the local capital market". So far, the only bonds offered for trading on the system are five sukuk, including three issued by the Saudi Arabian Basic Industries Corporation (Sabic) and two by the Saudi Electricity Company (SEC), with a cumulative value of SR21 billion (Dh20.7bn), the bank said in a study sent to Emirates Business . The returns on Sabic-I, Sabic-II and Sabic-III are 40, 38 and 48 bps, respectively, while SEC is priced at 45 bps above Saibor. The study noted that the Capital Market Authority (CMA) recently approved another sukuk to be issued by SEC, which is expected to raise SR7bn. "At present, most investment projects in Saudi Arabia are financed either by the government or top-tier banks. Hence, the establishment of a secondary bond market will provide alternative sources for raising long-term funds," said NCB. "This also comes at a time when bank lending is still constrained and access to international capital markets is limited. Going forward, we believe sukuk will become an important element in financing, given the immense size of infrastructure projects in the pipeline and investors' appetite for seeking stable returns and portfolio diversification," it added. Saudi Arabia, the world's oil powerhouse, has approved plans to invest more than $400bn (Dh1.46 trillion) in infrastructure development in the next five years. It has also announced a record budget of SR475bn for 2009 in a bid to stimulate the economy and cushion the impact of the global financial distress. Announcing the launching of the bond market, CMA said it would contribute to increasing liquidity and attracting foreign investment, which is targeted by the kingdom as part of reforms to ease reliance on unpredictable oil sales. "Liquidity in Saudi Arabia is now available and we could benefit from foreign investment in this regard," said Abdul Rahman Al Tuwaijri, Chairman of CMA. The Saudi bond market is the first in the six-nation GCC although other members have spoken of plans to set up such a market within a long-term programme to create a pan-GCC bond market. Dubai and Abu Dhabi have spearheaded one of the largest bond issues in the region over the past two months but only banks and institutional investors have been trargeted. In remarks last month, Tom Healy, Chief Executive of Abu Dhabi Securities Exchange, said it was time for the UAE to create a bond market to tap local and foreign capital amidst the global liquidity crunch. Analysts described the bond market in Saudi Arabia as a strategic investment move that would attract foreign capital, pool domestic savings, ensure funding for local companies and give individuals access to safe investment instruments. They noted that the move would also offset a sharp slowdown in domestic credit by the kingdom's banks as they adopt a more cautious lending policy because of the global crisis and the default problem by the Saad and Algosaibi groups. A spate of rate cuts by the Saudi Arabian Monetary Agency, the central bank, over the past months has failed to spur bank lending, with many banks returning to the US and other foreign markets for high yield investment. Official figures showed private sector credit growth has continued to decline in the past few months, with the 12-month rate falling to just over 10 per cent in April from a high of almost 33 per cent in June 2008. "Lending growth is now lower than deposit growth – a trend that was last in evidence in February 2008. Aside from the good returns on foreign assets, there are a number of reasons why banks remain reluctant to increase lending to the private sector in Saudi Arabia," said Saudi American Bank (Samba). It cited what it called the retrenchment of international banks, which it said has left local banks struggling to provide the necessary finance for large projects. "With the effective withdrawal of international banks from the regional project finance market, it is no surprise that local banks – which also have to contend with a mainly short term deposit base – have struggled to provide financing for large petrochemicals or utilities projects that can often exceed $20bn. These projects also have long lead times, meaning that banks must hold more risk-weighted capital to comply with Basel II regulations," Samba said. "Another factor is that Saudi banks remain cautious about corporate growth prospects, particularly for those firms that are dependent on export demand