Saudi government debt begins trading on Tadawul

The development of local and international debt markets runs alongside the Kingdom’s efforts to boost foreign participation in its equity markets. (AFP)
Updated 08 April 2018
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Saudi government debt begins trading on Tadawul

  • Saudi stock exchange begins trading local currency government bonds
  • The trading of 45 government debt instruments worth $54 billion has been officially launched
London/Dubai: The Saudi stock exchange began trading local currency government bonds on Sunday, in the latest move by authorities to deepen the Kingdom’s capital markets.
The trading of 45 government debt instruments worth SR204 billion ($54 billion) was officially launched at a press conference yesterday by the Tadawul’s CEO Khalid Abdullah Al-Hussan and Fahad Al-Saif, president of Saudi Arabia’s Debt Management Office.
Al-Hussan described the listing of government debt instruments as “an important step in the development plan of the sukuk and bond market, which is in line with the Kingdom’s Vision 2030.
“Listing government debt instruments will undoubtedly deepen the sukuk and bond market, which in turn will help boost liquidity in the secondary market and make debt instruments more attractive for both investors and issuers.”
Debt with maturities of five, seven and 10 years are available to trade on the exchange, including floating- and fixed-rate bonds and Islamic instruments.
The Tadawul’s move is part of a strategy by the country’s economic policymakers to make financial debt instruments more tradeable in the expectation that they will fill a gap in the Kingdom’s capital markets.
“It’s still early days, but the longer-term potential is significant,” said M Nayal Khan, the head of institutional sales trading at Saudi Fransi Capital.
“These products were historically traded among local treasury desks; they’re now available to retail investors as a means to diversify the risk on their existing portfolios, i.e. away from real estate and highly speculative equities and into KSA government debt instead.”
Local investors are the principle target for the debt instruments, said Khan, with foreign investors more likely to trade in dollar-denominated Saudi debt.
Saudi government departments have been encouraged to raise more capital via bond issuance, but the market for such paper has not been very liquid, with investors finding it difficult to trade bonds in the secondary markets.
 
It is hoped that the transparent pricing of government debt on the exchange will create a benchmark for future issuances, thereby encouraging Saudi corporates to issue bonds and reduce their reliance on bank lending.
“The move to list 45 (instruments) on Tadawul will increase marketability and give the Kingdom a domestic debt profile that can be used to assess the creditworthiness and ratings of its local issuers,” said one financial expert yesterday in Riyadh, who asked not to be named.
The strategy to develop a local secondary debt market goes hand in hand with the moves to develop sovereign international debt markets to tap global investor appetite for Saudi bonds, part of the financial strategy to compensate for falling oil revenue since the price of crude began falling in the summer of 2014.
The Kingdom sold $39bn of sovereign bonds in 2017 in a mix of shariah-compliant and conventional instruments, following a record $17.5bn sovereign bond issued in 2016.
Investors expect more big global issues some time this year, following a refinancing of an earlier $10bn bond. The trend toward international bond sales looks certain to continue. The ministry of finance has set a debt ceiling of 30 percent of GDP in its efforts to wipe out the fiscal deficit by 2023, while the current level is about 17.5 percent.
 
The move is all part of a strategy to modernize and streamline the Saudi financial sector. Private corporations in Saudi Arabia have traditionally been more reliant on bank borrowing to meet capital expenditure requirements and fund expenditure.
The practice of “name lending”, in which banks advance loans to corporate borrowers on the back of their family backing and reputation, has fallen into disrepute after the global financial crisis.
The development of local and international debt markets runs alongside the Kingdom’s efforts to boost foreign participation in its equity markets.
Saudi stocks will be included in FTSE Russell’s emerging market index next March, a move expected to attract billions of dollars of investment from around the world.
International banking institutions have been rushing to enter the Kingdom to take advantage of the opportunities presented by the Vision 2030 plan to transform the economy away from oil dependency.
Many banks, including American giants Goldman Sachs and Citibank, have been ramping up their presence in Riyadh in anticipation of the new business to come from the economic diversification strategy.

Decoder

Saudi companies currently rely on bank lending more than corporate debt issuances. A secondary market in government debt may encourage firms to issue more bonds and sukuk

FASTFACTS

$39bn

Saudi Arabia sold $39 billion of sovereign bonds in 2017, after tapping international debt markets for the first time in 2016


Despite efforts to stop lira fall, Turks still worried

Updated 26 May 2018
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Despite efforts to stop lira fall, Turks still worried

ANKARA: After the embattled Turkish lira weakened against the US dollar this week, Turks remain troubled over the economy despite the government’s reassurances.
The lira’s drama worsened on Wednesday when Japanese investors sold Turkish assets, after comments by President Recep Tayyip Erdogan spooked investors earlier in May.
The lira hit 4.92 against the dollar before paring back some of its losses on Wednesday after an emergency central bank interest rate hike, but for many it’s not enough.
In a busy bureau de change on one of Ankara’s popular streets, thoughts turn to the worsening situation and fears that the country is already in a “currency crisis,” as experts at Commerzbank have described it.
During AFP’s visit, dozens came in to change their liras into gold, dollars and euros.
Ali Yilik indicated he was not convinced by Ankara’s reassurances as he changed his money into dollars for work.
“Who wouldn’t be worried about the exchange rate (situation)? This is not something that happens in normal conditions. It is extraordinary,” Yilik, who sells construction material, said.
Ali’s son Yahya Yilik, who is the manager at Tunali Doviz, said more Turks were coming in buying euros and dollars amid worries that the lira would fall further.
“They think the lira will keep losing value,” Yilik told AFP, adding that interest rate increases were a “temporary measure.”
In the past “one or two weeks,” the manager said the center had sold more foreign exchange than those wanting to buy lira.
The fall followed Erdogan comments during his UK visit mid-May when he indicated he wanted a greater say in monetary policy if he won in June 24 polls. This then raised concerns over economic policy becoming more unpredictable.
Student Necdet Guven was in the bureau de change to obtain dollars ahead of a trip to the US in mid-June but said he was “really worried” about the economy.
“Because everyday our economy gets worse. In the past, Turkey used to be among the top countries for agriculture and livestock, but now we import meat from Serbia and straw from Russia,” Guven lamented.
“We are not that developed a country in terms of industry,” he added, saying he believed Turkey had the potential to develop the economy further.
The lira appeared to show no signs of dramatic improvement and was at 4.70 against the dollar on Friday. In the past month, the lira has lost over 16 percent of its value against the greenback.
In a bid to ease concerns, Deputy Prime Minister Mehmet Simsek — an ex Merrill Lynch economist trusted by markets — on Friday said the central bank “would do whatever is necessary” during an interview with NTV broadcaster.
“There is no question of taking steps back on either the independence of the central bank or the rule-based market economy,” Simsek vowed.
But not everyone looked at the situation pessimistically.
Orhan Albayrak said the euro and dollar’s value was increasing because of “outside forces’ economic pressure on Turkey,” adding there was “an artificial rise.”
But Albayrak, a wholesaler, was hopeful the lira’s fortunes would improve toward the date of the presidential and parliamentary elections.
“But when there are five, 10 days to the elections, I believe this increase will reverse,” he added.
Albayrak said the three percent key rate rise had some impact, but believed the lira could improve and “reach 4.2, 4.3” with further central bank moves supported by the government.
After the rate hike on Wednesday evening, Erdogan insisted Turkey would adhere to the global governance principles on monetary policy in the new system post-election.
But, Erdogan added he would not let those principles “finish our country off.”