Over the last few years, the Saudi sukuk market has grown considerably, and could have the potential to become an important source of funding for major companies, as well as an alternative investment and diversification arena for investors and traders. In June, the FTH report said, we saw the introduction of an automated order-driven sukuk market, however many have argued that this by itself will not lead to the growth and development of the Saudi sukuk market. Although a lot more information and breadth is necessary before the sukuk market truly becomes integrated as a serious option for investors and capital raising, it is possible that current conditions regarding fund raising, and the limited liquidity available may help expedite the process. Nonetheless, it is a step in the right direction toward boosting the debt capital market in the Kingdom.
In Saudi Arabia, the impact of the crisis on sukuk has been mixed. As elsewhere, investor appetite for risk and financial assets has diminished. However, the tightening of bank lending policies and the reduced attractiveness of IPOs means that companies are examining alternative sources of funding, particularly sukuk. As a result several companies have raised funds through sukuk since the crisis intensified in September of last year. Pricing of the new sukuk reflects the higher risk aversion in the market, with the Saudi Electricity Company (SEC) issue in June priced to yield 160 basis points (1.6 percentage points) over the prevailing three-month Saudi interbank rate, compared to a spread of just 45 basis points over the same period for the sukuk it issued in July 2007. Dar Al-Arkan and Saudi Hollandi Bank paid higher premiums earlier this year and late last year, respectively, but they do not have the large government ownership that reassures investors.
“The development of an active sukuk market would be of great value to Saudi investors. Local investors have limited investment channels and the bulk of their funds are in the stock market or real estate. Both are subject to considerable volatility and in the case of the former, many investors have made large losses in the last few years. Given the much lower risk associated with debt, a vibrant and liquid sukuk market will help asset allocation decisions and allow portfolio diversification.
Oil
At the beginning of the year, there was a stunning decline in oil prices, dropping to below $50 a barrel from a high of nearly $150, which left many oil exporting countries fearful about cutting government spending and expenditure, and with Saudi Arabia forecasting a deficit in the annual budget. However, over the past two months, we have seen a significant rise in crude oil prices, riding on an improvement in investor sentiment regarding financial markets, a weaker US dollar, and speculation that economic recovery was ahead, the report said.
Nonetheless, critics and employment reports have kept many skeptical about the prospects of improvement by the end of the year, yet while we see a clear and visible slowdown in the West, there are stronger signs of recovery from the East, especially China, it added.
In an effort to stall declining oil prices, OPEC agreed at meetings since September 2008 to cut its oil output by about 5 percent of daily world demand, or 4.2 million barrel per day. Yet although the effects of this were delayed, we are currently seeing a surge in oil prices, as they hit year-highs, closing at $80 a barrel.
The recent increase in oil prices is largely built on speculation of an improved economy. Total world oil consumption is expected to record a rebound in 2010, rising by 880,000 barrels per day from year earlier levels, on the assumption of expected economic recovery. In addition, the IMF (International Monetary Fund) has improved its forecast for world real GDP in 2010 from 1.9 percent to 2.5 percent.
Another explanation for the oil price increase, as well as crediting OPEC supply management and a lack of oil, has been the argument that oil has become expensive to extract. The market was excited about new finds in the Gulf of Mexico, the coast of Brazil and in Kazakhstan, however reaching supplies in both new and old fields has become costly. Furthermore, political uncertainty in countries such as Nigeria, Iran and Venezuela may play an integral part in the price increase.
“Yet with so much speculation, there still is the possibility that the strengthening oil price phase may be short-lived. There remains a lot of uncertainty regarding global demand forecasts for 2010,” Alsayrafi said.
Real estate
Unlike other Gulf states, real estate in Saudi Arabia has been expanding at a steady rate, with no specific boom. Increased efforts are being made to address the huge supply gap in residential, commercial and hospitality space, with projections that the growth rate will hold at between 5 to 7 percent until 2012. Investment in the real estate sector alone this year are estimated to reach SR1.125 trillion, with projections of up to SR1.5 trillion by 2010, the report added. Reforms have been taken place in all sectors in an attempt to attract foreign direct investment into the Kingdom. At the moment, the Kingdom’s relative economic stability is one of the main motivators, drawing investors into the region. In addition, the Kingdom’s growth potential makes it an attractive location for investors, suppliers, and contractors looking for promising business opportunities. “With the country facing a shortage in housing due to a rising population and a decline in household size, we see a huge demand-supply gap. Therefore, we will see a particular surge in the housing construction industry,” the FTH report said.
Official reports have declared that Saudi Arabia is well on its way to economic recovery. Looking at the stock market, there has been a noticeable improvement in liquidity, indicating a boost in investor confidence, which continued past the last two weeks of Ramadan, during which domestic liquidity traditionally does see a large boost. Following a relatively successful earnings period, there were better than expected results and it is also apparent that the economy has not yet fully recovered, but there are impressive rallies. Namely, SABIC’s (Saudi Basic Industries Corp.’s) earning results, which exceeded expectations, still saw net profit down 50 percent from the same period last year.
“Government stimulus and proactive fiscal policy have been a large factor in maintaining relative stability of the Saudi economy. SAMA Gov. Muhammed Al-Jasser has said that the stimulus package will continue until planned projects are completed. All the above factors point to the fact that while the Saudi economy is recovering, it has still not yet fully recovered,” Alsayrafi said.
