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Saudi’s plan to open market sparks sukuk speculation



Riyadh: Saudi Arabia's plan to open its $531 billion stock market to foreigners is prompting speculation that Islamic bonds will be next.

The government's approval of overseas financial institutions to trade equities may herald a similar relaxation of rules in the local-currency primary debt market, according to Mashreq Capital DIFC and Rasmala Investment Bank. The nation's Capital Market Authority said yesterday that the stock- market change would take place in the first half of next year.

"Capital markets are a package, you can't have one part without the other," John Sfakianakis, chief investment strategist at Riyadh-based investment company MASIC, said by phone on Wednesday. "The fact is that Saudi sukuk eventually should also be open to everyone."

Opening the local-currency sukuk market would give foreign investors access to companies that sold 42 billion Saudi riyals ($11.2 billion) through a dozen sales in the past year. That's more than three times the amount of dollar Islamic bond sales, which are open to overseas buyers.

Pricing tightly
In the 12 months through on Tuesday, only four dollar-denominated sukuk have been sold in Saudi Arabia. Those came from two issuers, Dar Al Arkan Real Estate Development and Saudi Electricity, according to data. Twelve different borrowers, including National Commercial Bank and Almarai, each issued a riyal-denominated Islamic security in the period.

"It's a step in the opening up of Saudi capital markets overall, and that benefits sukuk investors because there will be more potential product if we can get access," Abdul Kadir Hussain, who oversees about $700 million as chief executive officer at Mashreq Capital in Dubai, said in a phone interview. It will also make it easier for domestic borrowers to issue Islamic bonds, he said. Access to the kingdom's debt market may appeal more to investors wanting to broaden their exposure than to those seeking yield, according to Doug Bitcon, a Dubai-based fund manager at Rasmala. "Lots of Saudi debt prices very tightly," Bitcon said by phone on Tuesday. "I'm not sure how attractive that will be to international investors beyond portfolio diversification."

The average profit rate, equal to a bond's interest rate, of 41 outstanding sukuk from Saudi Arabia was 3.11 per cent, according to data. That compares to 5.06 per cent for 44 Islamic bonds outstanding from the neighboring United Arab Emirates, the data show.

Saudi growth
Gross domestic product in Saudi Arabia will probably expand by 4.15 per cent in 2014, versus 3.8 per cent last year, economist estimates show. The world's biggest exporter of oil and de facto leader of Organisation of Petroleum Exporting Countries (Opec) is removing barriers to one of the most restricted major stock exchanges as the government pursues a $130 billion spending plan to boost non-energy industries.

The move may lead to the country's inclusion in MSCI's indices, which are used to measure performance by money managers with an estimated $9 trillion of assets.

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