Riyadh-Mubasher: A return to debt issuance by the Saudi government could encourage growth in the kingdom’s corporate sukuk market, Fitch Ratings said in a report.

The agency added that the upcoming regulatory reform could also make sukuk more attractive for a corporate sector that has traditionally relied heavily on bank lending.

The recent decline in oil prices has sparked expectations that Saudi Arabia may issue domestic sovereign debt this year for the first time since 2007. Much of this debt would probably be long term and would be bought by the country's banks, which would consume some of the plentiful liquidity that has helped make bank lending the primary source of funding for Saudi corporates, Fitch indicated.

It added that even without sovereign issuance lower oil prices may affect banks' lending appetite, which could reduce the cost difference between loans and sukuk or bonds for issuers.

“We believe corporates will largely maintain their capex programmes and some funding for these plans may therefore move to the sukuk market,” the global agency said.

Sovereign debt issuance would create another benefit for potential corporate issuers by helping create a pricing benchmark.

The agency believes Saudi corporates are more likely to issue sukuk than bonds because of the wider local investor base for sukuk and because some are restricted to sharia-compliant borrowing by their own rules.

Regional and international investors are also increasingly happy to invest in sukuk. This view is supported by the absence of conventional corporate bond issues in Saudi Arabia since 2013, while sukuk issuance was $7.8 billion in 2014.