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