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


Pakistani central bank lifts interest rate as inflation bites

Updated 20 May 2019
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Pakistani central bank lifts interest rate as inflation bites

ISLAMABAD: Pakistan’s central bank raised its key interest rate to 12.25% on Monday, warning that already soaring inflation risked further rises on the back of higher oil prices and reforms required for a bailout from the International Monetary Fund.
The 150 basis points increase follows a preliminary agreement last week with the IMF for a $6 billion loan that is expected to come with tough conditions, including raising more tax revenues and putting up gas and power prices. It was the eighth time the central bank has increased its main policy rate since the start of last year.
With economic growth set to slow to 2.9% this year from 5.2% last year, according to IMF forecasts, the rate rise adds to pressure on Prime Minister Imran Khan, who came to power last year facing a balance of payments crisis that has now forced his government to turn to the IMF.
Higher prices for basic essentials including food and energy has already stirred public anger but the central bank suggested there was little prospect of any immediate improvement.
Noting average headline inflation rose to 7% in the July-April period from 3.8 percent a year earlier, the central bank said recent rises in domestic oil prices and the cost of food suggested that “inflationary pressures are likely to continue for some time.”

 

It said it expected headline inflation to average between 6.5% and 7.5% for the financial year to the end of June and was expected to be “considerably higher” in the coming year. Expected tax measures in next month’s budget as well as higher gas and power prices and volatility in international oil prices could push inflation up further, it said.
It said the fiscal deficit, which the IMF expects to reach 7.2% of gross domestic product (GDP) this year, was likely to have been “considerably higher” during the July-March period than in the same period a year earlier due to shortfalls in revenue collection, higher interest payments and security costs.
Despite some improvements, financing the current account deficit remained “challenging” and foreign exchange reserves of $8.8 billion were below standard adequacy levels at less than the equivalent of three months of imports.
The central bank said it was watching foreign exchange markets closely and was prepared to take action to curb “unwarranted” volatility, after the sharp fall in the rupee over recent days that saw the currency touch a record low of 150 against the US dollar.
Details of what Pakistan will be required to do under the IMF agreement, which must still be approved by the Fund’s board, have not been announced but already opposition parties are planning protests.
As well as higher energy prices that will hit households hard, there are also expectations of new taxes and spending cuts in next month’s budget to reach a primary budget deficit — excluding interest payments — of 0.6% of GDP.
With the IMF forecasting a primary deficit of 2.2% for the coming financial year, that implies squeezing roughly $5 billion in extra revenues from Pakistan’s $315 billion economy, which has long suffered from problems raising tax revenue.

FACTOID

Pakistan’s economic growth is set to slow to 2.9% this year.