Saudi Politics Blamed as Market Asks Where Did All the Sukuk Go?

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When King Salman started Saudi Arabia’s biggest political shakeup in at least a decade, the fate of sukuk sales was probably the last thing on his mind.

Saudi companies have yet to market a single security in 2015, making it the country’s quietest start for Islamic sales in nine years, according to data compiled by Bloomberg. King Salman has reorganized his cabinet, removed princes from government roles, merged ministries and realigned succession since ascending to the throne in January.

“You’re not going to commit to large-scale spending unless you’re confident the government’s policies will continue,” Emad Mostaque, who travels regularly to Saudi Arabia as a strategist at emerging markets consultancy company Ecstrat Ltd. in London, said by e-mail on May 22. “You had a complete overhaul of the political process, realignment of ministries. There have been a lot of changes. You need some stability before you start looking at sukuk-type issuance.”

The dearth of Islamic bonds from the kingdom has taken its toll on borrowing in the six-nation Gulf Cooperation Council, where about $3 billion has been raised through sukuk this year, 64 percent less than in 2014. Saudi borrowers were the biggest issuers of Shariah-compliant debt in the region last year, and the largest in the world after Malaysia’s.

Political Shakeup

Since suceeding his half brother King Abdullah, 79-year-old King Salman has named Mohammed Al-Jadaan as head of the Capital Markets Authority, fired the kingdom’s intelligence chief and the head of the National Security Council, and removed Oil Minister Ali Al-Naimi as chairman of Saudi Arabian Oil Co., the world’s biggest crude exporter.

“The dramatic political changes have put the private sector on hold,” Ghanem Nuseibeh, the founder of Cornerstone Global Associates, which advises clients on risk in the Middle East, said by phone from London on May 24. “Because the private sector relies heavily on government grants and subsidies, there’s a strong link between the two.”

Saudi issuers raised $7.9 billion through the sale of Islamic bonds last year, according to data compiled by Bloomberg.

Temporary Slowdown

Sales will probably rebound as the government burns through foreign reserves at a record pace, and as banks struggle to keep up with borrowing needs, according to Ecstrat’s Mostaque. The kingdom spent $36 billion of the central bank’s net foreign assets in February and March, the biggest two-month drop on record.

“The slowdown is temporary because companies need money for expansion,” Mostaque said. “You expect a pickup because the political situation in Saudi Arabia is stable. Budget spending will continue and there will be more need for issuance.”

Larger companies will have to tap the sukuk market to finance their expansion plans, according to John Sfakianakis, the Riyadh-based director of the Middle East at Ashmore Group Plc.

“It’s unavoidable given the economic size of these companies for them not to consider issuing,” he said by phone on May 24.

Saudi Arabia, the birthplace of Islam and home to world’s biggest Islamic banking pool after Iran, is pursuing a $130 billion spending plan to diversify its economy away from oil, and has vowed to invest in major infrastructure projects. King Salman’s changes will impact many areas, Cornerstone’s Nuseibeh said, especially financial markets.

The country’s economy may expand 2.5 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg, after growing at an average rate of 5.4 percent in the previous four years.

“There’s uncertainty, but not in a negative way,” Nuseibeh said. “People are being cautious about everything they do. They’re waiting to see what’s going to happen.”