Saudi Arabia Said to Weigh Opening Nation’s Debt Markets

Banks with experience arranging Islamic bond sales may stand to benefit from the potential opening of Saudi Arabia’s debt market to foreign investors, according to the investment banking unit of Mashreqbank PSC.

“There’ll be a lot of potential for non-Saudi banks to get involved on the advising and arranging side,” Abdul Kadir Hussain, who oversees about $700 million as chief executive officer of Mashreq Capital DIFC Ltd. in Dubai, said by telephone. “They’re also some of the biggest sukuk buyers.”

Saudi Arabia is working on new rules aimed at promoting the local currency bond and sukuk market, three people with knowledge of the matter said yesterday. The rules are expected to allow foreign investors to buy local currency bonds for the first time and could be published early next year, they said.

Seven of the top 10 underwriters of Saudi Arabian sukuk issues this year were local banks, according to data compiled by Bloomberg. Banks from the United Arab Emirates and Qatar, such as National Bank of Abu Dhabi PJSC, Emirates NBD PJSC, Dubai Islamic Bank PJSC and Masraf Al Rayan are increasingly focusing on fee-generating capital market deals, Hussain said.

Foreigners can’t directly invest in new bond and Islamic bonds issued in Saudi riyals currently and are restricted to secondary market trading. Overseas investors are also prevented from investing in Saudi initial public offerings.

Restricting primary investments to Saudi citizens is a means for the government to redistribute oil wealth by allowing locals to profit from asset-price gains after they’ve been sold to the public. There are about $30 billion of outstanding bonds issued in Saudi riyals, according to data compiled by Bloomberg. The CMA declined to comment.

Largest Economy

The new rules for the debt markets are also expected to stipulate that ratings companies will need to have a local presence to rate domestic securities, two of the people said.

Saudi Arabia is a member of the Group of 20 nations and de facto leader of OPEC. King Abdullah is removing some restrictions to lure capital to the $745 billion economy.

“By G-20 standards the Saudi Arabian debt market is relatively underdeveloped,” Stuart Anderson, managing director and regional head for the Middle East at Standard & Poor’s, said yesterday in emailed comments. “The debt markets can and often do benefit from the opening up of the equity market and increased participation of institutional investors.”

Of the $24 billion of bonds issued out of the six countries of the Gulf Cooperation Council this year, $5 billion came from Saudi Arabian entities. National Commercial Bank, the largest bank in the kingdom by assets, issued a 5 billion riyal ($1.3 billion) sukuk in February.

Other companies to have tapped the riyal market this year include Saudi Telecom Co. and Saudi Electricity Co. Middle East borrowers are increasingly turning to the debt market as yields fall. The average yield for bonds from the Middle East dropped 54 basis points to 4 percent this year through Sept. 10, according to JPMorgan Chase & Co. indexes.

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