Saudi plan will help boost market for bonds

Sovereign issues would help firms price their debt

The need to supply finance for Saudi Arabia's ambitious infrastructure programme is expected to help deepen the country's bond market, bankers says. But the lack of sovereign bond issuance could act as a setback in creating a yield curve to guide corporate issuers in pricing their own bond sales. "Given the amount of infrastructure spending, it's inevitable that there will be more project bonds being issued," Rizwan Shaikh, the director of Citigroup Global Markets, said at a Saudi Arabia investment conference in Dubai yesterday.

Saudi Arabia has increased its budget for infrastructure projects by 16 per cent this year compared with last year, with expenditure expected to target power generation, construction and transportation. Saudi Electricity Company (SEC) planned to launch its first international bond issue early next year, a senior executive of the company said in May. Electricity demand in the kingdom had grown by 12 per cent so far this summer compared with last year due to a growing population and the development of projects, Ahmed al Jogaiman, the executive vice president of finance at SEC, said yesterday. The company was on course to double its capacity in the next decade, he said.

SEC has already issued three sukuk so far: the first was for 5 billion Saudi riyals (Dh4.89bn) over five years in 2007, followed by 7bn riyals last year and 7bn riyals in May. Historically, debt securities in Saudi Arabia have remained largely untapped. A more established debt market is seen as a way of offering borrowers greater flexibility and a wider range of funding sources. It could also help reduce companies' reliance on short-term bank finance.

The framework of the Saudi market may be putting off some international investors, said Rajiv Shukla, the managing director and head of global capital financing at HSBC Saudi Arabia. [e-mail]