Last week the Kingdom of Saudi Arabia (KSA) issued a 10-year USD sukuk (rated A1/A by Moody’s and Fitch) which was priced at mid-swaps plus 127bps having been tightened from initial guidance of MS+145-150bps. The issue, with USD13bn of orders, was ~5 times oversubscribed. This sukuk issue follows on from several KSA Eurobonds issued earlier this year so investor appetite remains strong: demand for Saudi Arabian bonds has been helped by index inclusion, greater investor awareness, a strong credit profile with positive yields.
This week Saudi Arabia’s ‘Future Investment Initiative’ or ‘Davos in the Desert’ is underway aimed at attracting foreign investment as the Kingdom aims to diversify its economy away from oil under the Vision 2030 strategy. While the IMF recently downgraded Saudi Arabia’s growth forecast putting growth for this year at 0.2% (down from 1.9% in July reflecting weaker oil based revenues) the non-oil part of the economy is growing robustly (2.9% yoy in 2Q’19).
Encouragingly, as the Kingdom looks to diversify growth away from oil based revenues, Saudi Arabia is improving its rankings for competitiveness and the ease of doing business. In the WEF Global Competitiveness Report 2019 Saudi Arabia was amongst the improvers reaching 36th position out of 141 countries (up from 39th/140 countries in 2018): this was helped by improvement in ICT adoption where it ranks 38th having improved its score by 9.4 points since 2018. This reflects the country’s rollout and increased penetration of broadband internet services. Innovation is also on an improving trend and they point to an increase in the number of patents (ranked 40th) and to R&D expenditure at 0.8% of GDP which puts it 43rd although it has a lot of scope to improve as R&D expenditure is 2.7% of GDP in the US.
Plus, the World Bank Group’s Doing Business 2020 review of the ease of doing business saw Saudi Arabia improve its ranking by 30 places to 62nd out of 190 economies. Saudi Arabia’s shift to diversify its economy and facilitate investment has helped improve the business climate with reforms such as a ‘one-stop shop’ for business registration and the introduction of a secured transaction law and insolvency law, protections for minority investors cited as helping to improve its ranking.
KSA and a number of quasi-sovereign issues continue to screen attractively within our universe: For example, using a best rating of A1 KSA 4.5% 2046 trades ~2.9 credit notches cheap.