Banking & Finance

Tax on foreigners may be axed to boost Saudi bond market

June 13, 2024, 1:29 PM

Saudi foreign debt flags — Saudi Arabia's 5 percent withholding tax on interest payments to corporate bondholders is 'unattractive and discouraging for foreign institutional investors'

5% ‘unattractive and discouraging’
Calls for withholding tax to go
More giga-project debt issuance wanted

The tax on foreign investment in Saudi corporate bonds may be scrapped in an effort to boost the market.

Saudi Arabia’s Capital Markets Authority has issued a report describing the 5 percent withholding tax on interest payments to corporate bondholders as “unattractive and discouraging for foreign institutional investors”.

It called for “easing tax requirements for foreign investors by removing the withholding tax on interest payments on debt instruments”.

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The CMA also wants more giga-project debt issuances, it said in the report, Strategic Directions to Develop Sukuk and Debt Capital Market.

The report also called for the kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), which owns and finances the Saudi giga-projects, and its top companies to do more debt issuance “to finance their activities and projects”.

PIF is under pressure to raise debt as it struggles to maintain funding for the $1.25 trillion of Saudi giga-projects as oil prices remain below Saudi Arabia’s budget breakeven price of around $96 per barrel and the kingdom struggles to meet foreign direct investment targets.

Foreign investment in Saudi capital market reaches $93bn

Analysts say the Saudi banking system alone cannot provide enough funding to finance the ambitious Vision 2030 strategy, and it will require a combination of developing the local capital market and tapping international markets.

The CMA report also proposed measures such as easing the requirements of offering, disclosure, listing and registration of debt instruments and allowing trading, settlement and clearing of debt instruments in foreign currencies.

But the report said that since 2019, unlisted issuances have far outpaced listed debt market issuances. The unlisted grew from SAR72 billion ($19.2 billion) in 2019 to 105 billion in 2023, but listed issuances fell from SAR23 billion to SAR20 billion. The number of issuers over the period grew from eight to 22.

“The numerous regulatory requirements for the public offering of sukuk and the debt instruments could be one of the factors contributing to the listed corporate debt market’s limited growth,” the CMA report said, adding they raised the cost and duration of the process.

Sukuk are sharia-compliant bonds that were developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law.

The Saudi government is trying to develop its financial markets through debt and derivatives markets as well as IPOs and secondary offerings.

The state oil giant, Aramco, raised $11.2 billion this month in a follow-on offering, the largest secondary offering in Europe, the Middle East and Africa since 2000.