Saudi Arabia's 13b riyal sukuk nearly three times oversubscribed

The kingdom sold Islamic bonds in three tranches with maturities ranging from five years to 10 years

Saudi Arabia and Ras Al Khaimah, which both have an A rating, are expected to account for 20 per cent of the total debt. Faisal Al Nasser / Reuters

Saudi Arabia, the Arab world's largest economy, said its 13 billion Saudi riyal (Dh12.7bn) Islamic bond sale drew demand for nearly three times the amount of sukuk on sale.

Subscription for the issue, which was divided into three tranches, exceeded 38bn riyal, the equivalent of 295 per cent coverage ratio, the Saudi Arabian Ministry of Finance said on its web site.

The Islamic bonds were issued as part of the Saudi Arabian government riyal denominated sukuk program. The government sold a 2.1 bn riyal tranche that matures in 2022, a 7.7 bn riyal tranche that matures in 2024 and a 3.2bn riyal tranche that matures in 2027.

The ministry didn't give the profit rates that came with Islamic issue. Bloomberg News, citing people familiar with the sale, said the five-year sukuk was priced at 2.70 per cent, the seven-year at 3.20 per cent and the 10-year securities at 3.50 per cent.

Gulf countries have drawn down on reserves, taken advantage of low borrowing costs and turned to international and regional markets to raise debt as a three year oil slump has decreased revenues and widened budget deficits.

"We expect GCC states to continue borrowing both domestically and internationally, ramping up their debt burdens," BMI Research, a unit of Fitch said in a report today. "While borrowing costs will rise, we expect all GCC governments to retain access to foreign funding in the years ahead, as debt ratios remain relatively low across the region."

Last month, the kingdom sold 17 billion Saudi riyals of sukuk under a newly-launched issuance programme. In April, Saudi Arabia sold US$9bn worth of international sukuk, its first foreign sale of Islamic bond.

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In October Saudi Arabia sold $17.5bn worth of bonds internationally for the first time to help shore up its finances to offset revenue shortfalls from stagnant oil prices. Prior to that, the government was selling 20bn riyals of bonds to banks each month since mid-2015 to help finance its budget deficit.

The government is forecasting a budget deficit of 198bn riyals for 2017, compared with an actual deficit of 300bn riyals last year. This month Saudi Arabia's Ministry of Finance said the kingdom narrowed fiscal deficit by a fifth from a year earlier in the second quarter, thanks to an uptick in revenues and a drop in spending.

Revenues rose 6 per cent year-on-year to 163.9bn riyals during the second quarter, with oil revenues surging 28 per cent to 101bn riyals on higher oil prices.

Spending fell 1.3 per cent to 210.4bn riyals in the second quarter, leading to a deficit of 46.5bn riyals, compared to a deficit of 58.4bn riyals in a year earlier period.

The state relies on sales of crude to fund more than 75 per cent of its budget. The plummeting of oil prices, which began in late-2014 has prompted the government to try and plug the gap in its finances via debt sales, reduction in subsidies and new forms of taxation.

Fiscal deficits across the GCC are set to narrow gradually to an average of 10.3 per cent of GDP in 2017 and 5.0 per cent annually over the 2018-2022 period from 11.3 per cent of GDP for 2016, according to BMI.