The Kingdom of Saudi Arabia embarked upon a significant economic reform program in 2016 (Vision 2030), seeking to diversify away from oil dependence, and high economic cyclicality, and to increase the size of the non-oil and private sectors. Financial market reforms and improved foreign investor access to Saudi markets are part of this process, and the development of a full, and liquid, market in local currency sukuk bond issues.
- Bond issuance is increasingly skewed towards local currency riyal issuance, as a result. Saudi’s favorable credit record, and robust exchange rate peg to the US dollar since 1986, is reflected in high credit ratings.
- Saudi bonds show quite high correlation to US dollar bonds, reflecting the exchange rate peg, and provided this remains in place, local currency bond returns are not at risk from exchange rate weakness for foreign investors, during global market shocks.
- COVID-19 represents a risk to the Saudi economy via lower oil prices, although risks to the global economy are diminished by substantial central bank QE, and IMF/World Bank support.