Saudi reluctance on IMF advice may curb debt sales

Saudi Arabia’s failure to develop a local-currency bond market in line with an International Monetary Fund recommendation may limit debt sales to the biggest companies in the world’s top oil exporter.A 15bn-riyal ($4bn) sukuk by the state-controlled General Aviation Authority lead local-currency offerings from at least four borrowers in the biggest Arab economy, data compiled by Bloomberg show. This compares with one sale in the year-earlier period and trails offerings in countries like Norway, an oil exporter with an economy 4% smaller, where 96 borrowers raised about $12.8bn.While most Saudi companies rely on bank loans and equity markets for funding, greater access to bond markets in the region is essential to expand funding sources for private businesses and develop “more modern economies,” Masood Ahmed, Middle East and Central Asia director at the International Monetary Fund, said on May 2. Saudi Arabia, which is spending $500bn on infrastructure, limits sovereign borrowing to weekly treasury-bill offerings even as Qatar expands such sales.“The absence of a government bond market, specifically a yield curve, makes it that much more difficult to see a private bond market develop in any country,” Mohieddine Kronfol, Dubai-based chief investment officer for global sukuk and Middle East and North Africa fixed income at Franklin Templeton Investments, said by phone on May 10. “Typically they go hand in hand: Nowhere around the world do you have a functioning, active corporate bond market without a government bond market.”Saudi Arabia is rated AA- at Standard & Poor’s, the fourth- highest investment grade and one below level neighbouring Qatar, which is listing Treasury bills on its local bourse to encourage local-currency offerings.Saudi authorities, in response to an IMF recommendation to maintain a stock of government securities with different maturities to establish benchmark yields, said the lack of a government bond market hasn’t stopped companies from selling debt, the Washington-based lender said in September. The kingdom, home to the largest stock market in the Middle East by market value, has been steadily retiring maturing government debt, “reducing the volume of securities available for banks to manage liquidity,” the fund said.Five-year credit default swaps, a measure of investor confidence in the Saudi economy, climbed eight basis points, or 0.08 percentage point, this year to 121, according to data provider CMA. This compares with a decline of 19 basis points in the credit risk of Norway, which is rated AAA at Standard & Poor’s, the highest investment grade, the data show.Borrowers in the kingdom are using the Saudi Interbank Average Offered Rate, or Saibor, the interbank rate set by the country’s lenders, to price bonds, said Nick Stadtmiller, head of fixed-income research at Dubai-based Emirates NBD PJSC, the United Arab Emirates biggest bank by assets.“The bottom line is that having a sovereign curve would help, but you don’t definitely need it,” he said by phone on May 10. “Banks have an idea of where a company’s credit risk stands relative to Saibor, because that’s the benchmark they use for loans as well.”Other sales this year include a 1bn-riyal sukuk by Almarai Co, the country’s largest food producer by market value, in March. Saudi British Bank, partly owned by HSBC Holdings, raised 1.5bn riyals in five-year floating Islamic bonds in the same month.Still, a corporate bond market “doesn’t work only off Saibor, it works on the spread between the implied risk-free rate, which is the government rate for that particular maturity, versus the credit premium you trade at,” Abdul Kadir Hussain, chief executive officer of Dubai-based Mashreq Capital DIFC Ltd, said by phone on May 10. While relying on bank loans stems primarily from “the private nature of a bank market,” the lack of a liquid bond market limits other options, he said.Bank loans to private businesses grew 12.6% in the year to March, the fastest pace in three years, central bank data show. Etihad Etisalat Co, the kingdom’s second-largest phone company, known as Mobily, signed a 10bn-riyal refinancing agreement with seven local banks in February, the biggest syndicated loan in the Middle East this year, according to data compiled by Bloomberg.A common challenge facing most Arab countries, including Saudi Arabia and Qatar, is that demand for local-currency debt is largely met by banks, which tend to hold the securities to maturity, limiting secondary-market trading, said Hussain and Kronfol of Franklin Templeton Investments.“Our markets still suffer from the lack of non-bank financial players, from lack of depth,” said Kronfol. “I don’t think you have any other emerging market, especially with the footprint and resources the Middle East and North Africa region has and the pressures this region is facing, that hasn’t made developing financial markets a national priority.”The GCC, that includes Saudi Arabia, the UAE, Qatar, Kuwait, Oman and Bahrain, sits on one-fifth of the world’s proven oil reserves. All except Kuwait peg their currencies to the dollar.Saudi Arabia’s government is investing to upgrade infrastructure and create jobs. The kingdom’s non-oil economy may expand 6.5% this year, compared with 7.7% in 2011, according to IMF forecasts.“What should motivate policy makers is financing massive spending on infrastructure, reducing the economic drain of remittances and the benefits of developing monetary policy tools,” Kronfol said.