RIYADH (Reuters) – The strength of Saudi Arabia’s public finances should not prevent the government from issuing sovereign Islamic bonds — or sukuk — which will be critical to the development of corporate sukuk issues, bankers said.
Kamal Mian, head of Saudi Hollandi Bank’s Islamic banking unit, also said that any of Saudi Arabia’s 130-plus listed firms can tap the sukuk market, but the high financial cost linked to ratings from international agencies makes bank funding “always cheaper.”
“Rating is expensive … The (sukuk) Saudi market needs a local rating agency,” Mian told the Reuters Middle East Summit in Riyadh.
Saudi Arabia in June launched its corporate bond market, which was the Gulf’s third bond trading platform after Bahrain and Nasdaq Dubai.
Analysts say the move offered new funding to firms struggling to get loans, helping keep projects running as the kingdom launches a $400 billion stimulus package.
Saudi Finance Minister Ibrahim al-Assaf has said that government bonds would be issued only when the need for them arises.
OPEC’s most influential member has accumulated large reserves from crude exports, with no need to borrow.
Since the launch however, the corporate bond market has not attracted any new issuers, trading has been thin and it can sometimes take more than a month for a transaction to happen.
“The market definitely needs benchmark issues not only for the pricing but also several of those issues work as an anchor investment for the fixed-income investors,” Mian said.
He cited Malaysia as an example where the government has been issuing many sovereign issues to stimulate its bonds market even when it was not in desperate need for the cash.
Paul Gamble, head of research at Jadwa Investment, agreed that a sovereign bond was needed. “To get it more lively I think the government should be involved,” he said.
“We do think that more companies are looking toward it because it is a way of getting around caution with the banks,” he said of the new sukuk and bond market.
“The last sukuk, the (Saudi Electricity) sukuk was heavily oversubscribed so there is certainly more interest among the subscribers. The interest among investors is still limited.”
Abdullah bin Fahad Al Marri, chairman of Qatar First Investment Bank, said he expected to see sukuk activity generally pick up. “I think the worst is behind us. The big correction has taken place, and now people are just checking what went wrong and are ready to start again,” he said.
“I think by the first or second quarter of next year the major players will start announcing new sukuk.”