Saudi Arabia opens up to Investors

On the 5th of April 2017, the Saudi Arabian government instructed members of the financial sector to put all ‘sukuks’ or bonds in dollars. This comes before one of the biggest roadshows in the nation’s history where investors..

On the 5th of April 2017, the Saudi Arabian government instructed members of the financial sector to put all ‘sukuks’ or bonds in dollars. This comes before one of the biggest roadshows in the nation’s history where investors from across the globe will come a buy bonds allowing them to gain access to the historically very insular Saudi economy. The roadshow is going to bring in a total of 10 billion dollars into the country.

What is a ‘sukuk’?

A sukuk is an Islamic form of a financial certificate. It is like a bond in the western financial circuit. Sukuk’s are compliant to Sharia law. It doesn’t allow western bond structures to enter and guarantee the market stays under the rules of the state. An investor is issued a certificate and then uses the proceeds to enter the market by buying a certain asset, thus guaranteeing a mutual trade. The investor has partial ownership but not total, it is akin to buying stakes in a company. The issuer must also make a contractual promise to buy back the bond at a future date at par value. Interest is not allowed under Islamic law. The opposition in Islamic countries is that the western systems propagate debt and in the case of Saudi Arabia, sukuks guarantees no fluctuation in the market. They also link returns and cash debts back to the original item being bought. Investors thus work under Sharia law but it doesn’t affect debt financing or the benefits received from the asset.

Why is Saudi Arabia issuing the bonds to foreign investors?

The overabundance of oil in the world is making countries like Saudi Arabia look to new sources of income. Saudi Arabia is attempting to diversify their finances away from their oil reliance. By invoking sukuk’s, they are now allowing foreign companies to come into the market and buy assets. This will develop the economy and pull major companies out of debt. The country has taken a step back in terms of development of their economy since the ‘glut’ of oil and are now seeking to guarantee a growth for the future. They are looking for alternatives to oil and are being aided by large multinationals such as Citi, HSB, JP Morgan, BNP Paribas and Deutsche Bank.

Assessment

Countries like Venezuela are suffering due to the current state of oil in the world but also their ruinous decline is due to them not diversifying their economy. Their economy is solely reliant on oil and this has led to debt, inflation and in some cases even starvation amongst the people. Saudi Arabia cannot let this happen to them and have shrewdly halted massive projects and now opened themselves up to investors. This will allow Saudi Arabia to become take on the role of different hub in the future and not be subjugated by volatile oil market.

 

 

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