Saudi Exchange is focusing on raising awareness on the importance of debt markets for issuers, investors and the wider economy

Name: Noelle Al Jaweini 

Title: Chief of Cash Markets, Saudi Exchange

1. Why was the debt market developed and how does it contribute to the advancement of the Saudi capital market? 

The debt market is an important component of financial markets as it serves several market participants including businesses, governments and institutions, who are looking to raise long-term funds with access to liquidity at a relatively low cost. For investors, it is a lower-risk investment opportunity that ensures relatively safe, periodic returns.

Since its launch in 2009, Saudi Exchange’s debt market has strengthened and became a more sophisticated offering, encouraging the issuance of more diversified debt instruments. The total size of the listed sukuk and bonds in the market at the end of July was $115.6 billion, with a total of 73 listed sukuk and bonds available. The development of the debt market has increased the depth and liquidity of the Saudi capital market. It has enhanced our product offering and supported government development projects due to the increased global demand for government issuances.

This is just the start. We plan to further enhance our debt market infrastructure and increase the number of debt instruments available, in alignment with the Financial Sector Development Program (FSDP), under Vision 2030, and in alignment with international best practices.

2. What are the milestone developments in the Saudi debt market? 

We have welcomed several transformative milestones since the establishment of the Saudi debt market. These include the 2018 listing of government sukuk and bonds, the 2019 introduction of enhancements to the fee and commission structure of the sukuk and bonds market and the 2020 launch of the Kingdom’s first ETF backed by an underlying of Government sukuk.

What I want to focus on though is our two most recent enhancements. The Security Depository Center Company (Edaa) established a linkage with Clearstream, the post-trading services provider of Deutsche Börse Group. This facilitates access for Clearstream’s international investor network to Saudi-listed government and non-convertible corporate debt instruments, as well as ETFs.

This is the first time international investors will enjoy the benefit of not having to apply for Qualified Foreign Investor (QFI) status to invest in the Saudi Exchange. Instead, international investors will be eligible to hold Saudi fixed income securities and ETFs via a foreign nominee omnibus account structure, benefitting also from the usual suite of ICSD services, including offshore (internal) settlement.

In addition to this, we recently announced that the Saudi debt market has been included in the FTSE Emerging Market Government Bond Index (EMGBI). The inclusion of the Saudi debt market into the FTSE EMGBI marks the first time Saudi fixed income instruments have been included in a global index. This is a significant milestone in the development of the broader Saudi capital market and it also strengthens the bridge between local issuers and international investors.

3. Why do developments in a debt market matter and how can you make sense of them? 

Simply put, how capital markets perform affects not just the country in which they are located and its economy but all geographies, as we live in a hyperconnected world. And financial literacy is critical for the inclusive growth of any capital market.

At the Saudi Exchange, we actively seek to increase literacy through our Invest Wisely educational platform. This year, we have chosen to focus our educational campaign on raising awareness of the importance of the debt market for issuers, investors and the development of the wider economy. And we are aiming to increase understanding of specific debt instruments: namely sukuk and bonds. Below are some of the key questions we address through our platform regarding the debt market.

4. What are sukuk and bonds?

Sukuk and bonds are financial instruments issued by governments or corporations to raise money from investors for a period of time. Typically, sukuk and bonds distribute periodic coupon payments (either at a fixed or floating rate). At the end of this period, known as maturity, issuers pay back the money raised from investors, known as principal.

5. What is the difference between a sukuk and a bond? 

Sukuk are Sharia-compliant financial securities through which investors gain partial ownership of an issuer’s assets until maturity. Bonds are financial securities through which investors lend money to the issuer, indicating an obligation for repayment at maturity. Bondholders receive regular interest payments, while sukuk holders receive a share of the profit generated by the underlying asset.

6. Who benefits from debt products?

Debt instruments benefit both investors and issuers. For investors, debt instruments offer principal protection and a steady stream of income over the life of the debt instrument. They help investors to hedge against the volatility of the equity market and diversify their portfolios.

For issuers, corporate sukuk or bonds offer access to long-term capital beyond a conventional loan or the equity market. Debt instruments also provide businesses with financing options for long-term growth plans and ambitions, and enable access to international investors. Companies don’t have to give up any ownership control and debt payments are generally tax-deductible. Most companies use a combination of debt and equity financing.

For governments, sukuk or bonds are an effective way to raise money without raising taxes. Issuing debt can stimulate economic growth and raise the capital needed to fund development plans.