SUKUK MARKET

SAUDI SUKUK MARKET DEFIES GLOBAL CHALLENGES

Tadawul SAR Government Sukuk & Bond Index serves as a barometer of the performance of Saudi Arabia’s Islamic finance market. Launched in 2020 through a collaboration between the kingdom’s Stock Exchange (Tadawul) and iBoxx, the index is a comprehensive tracker for Saudi Arabian riyal-denominated domestic government bonds, including sukuk.

This supports the Saudi government's commitment to strengthen the domestic debt market infrastructure and raise its accessibility standards. The index, a product of combining Tadawul's market data with iBoxx’s indexing capabilities, not only provides transparency for the market but also positions itself as a potential benchmark for both domestic and international investors.

Since its inception, the index has undergone a few changes. Initially, it included a significant portion of conventional debt alongside sukuk, totalling 22 bonds (SAR 79.50 billion) at launch. However, it has progressively transitioned to a more sukuk-centric composition, with only seven bonds remaining as of August 2023 (SAR 13.96 billion). This shift is attributed to the growing preference for Shariah-compliant instruments, particularly sukuk, as domestic Islamic banks prioritise them for liquidity management over conventional bond issuance.

The Saudi Arabian domestic government sukuk market, represented by the iBoxx Tadawul SAR Government Sukuk Index, has witnessed steady growth, solidifying the country's position as the largest sovereign sukuk issuer globally.

                  

Over the past four years ending August 31, 2023, the number of sukuk increased from 29 to 50, and the total notional outstanding surged from SAR 146.95 billion to SAR 433.18 billion, according to S&P Global Ratings. Despite a reduction in domestic debt issuance since 2022 due to market volatility, interest rate changes, and fluctuations in crude oil prices, the sukuk market remains a resilient component of the Saudi economy

Examining the performance of the index, long-dated sukuk (10+ years) faced losses of 8.82% over the past three years, mirroring the challenges experienced by long-dated bonds in global government bond markets. However, short-dated sukuk (zero to one year and one to three years) contributed positively, offsetting some of the overall index losses (-4.68%).

In 2023, the long-dated sukuk segment emerged as the best-performing, with returns of 4.93% year to date, attributed to the global slowing of interest rate hikes by central banks.

The yield curve of the iBoxx Tadawul SAR Government Sukuk Index indicates a shift from 2-4% to 4-5% over the past three years, with a nearly flat profile and a slight inversion on the short end. Notably, most outstanding sukuk have a maturity of five to 15 years, with yields reflecting this duration.

Comparing the performance of the iBoxx Tadawul SAR Government Sukuk Index to other global government bond indices, including iBoxx Global Government Overall, iBoxx $ Treasuries, and iBoxx EUR Eurozone Indices, the sukuk index exhibited resilience during the COVID-19 pandemic in 2020 and the subsequent economic recovery in 2021.

In response to global economic shifts, the Saudi regulator has matched the interest rate hikes of the US Federal Reserve and the European Central Bank since 2022 to maintain riyal’s peg to the US dollar. Despite this, the iBoxx Tadawul SAR Government Sukuk Index demonstrated more robust performance compared to its global counterparts, emphasising the stability and attractiveness of Shariah-compliant instruments in challenging market conditions.

   

Moody’s Investors Service believes global sukuk issuance could decline USD 160 billion to USD 170 billion in 2023, compared to USD 178 billion in 2022, primarily driven by higher interest rates and improved fiscal positions of governments especially in the GCC and Southeast Asia.

“In the GCC and Southeast Asia, robust commodity prices associated with sustained economic growth have translated into stronger fiscal positions and lower issuance needs,” said Moody’s in the report. Moody’s also expects Saudi Arabia to remain the largest sukuk issuer in the region, but government activity is likely to be limited to refinancing maturing sukuk.

Saudi Arabia’s sukuk issuance is also going global.

In October, the Public Investment Fund successfully priced its first dollar-denominated Shariah-compliant trust certificates (sukuk). The USD 3.5 billion sukuk in two tranches is listed on London Stock Exchange plc’s International Securities Market (ISM).

“The sukuk issuance was more than seven times oversubscribed, with orders exceeding USD 25 billion, reflecting investor confidence in PIF. Proceeds from the issuance will be used by PIF for its general corporate purposes. Loans and debt instruments represent one of PIF’s sources of funding,” according to the sovereign wealth fund.