Why SAR denominated paper will be hard to ignore for global funds

Saudi local debt goes global: SAR-denominated government sukuk are heading into two of the world’s most widely-tracked emerging market bond indices — JPMorgan’s Government Bond Index for Emerging Markets (GBI-EM) and Bloomberg’s EM Local Currency Government Index — in a move that analysts say marks the moment Saudi local debt graduates from a regional asset class to a global one.

ICYMI- Saudi sukuk will enter the JPMorgan index on a phased basis starting 29 January 2027 with an expected weight of 2.52% of the index, and will join the Bloomberg index following the end-April 2027 rebalancing, with a potential phase-in, the index providers said last month. The Bloomberg index version that includes Saudi Arabia is expected to be published in 3Q 2026.

The size of the prize: Saudi Exchange CEO Mohammed Al-Rumaih said the dual inclusion is expected to generate over USD 10 bn in foreign inflows. JPMorgan identified eight sukuk issuances that qualify for inclusion, with a total value of USD 69 bn. Saudi sukuk carrying a remaining maturity of up to 15 years are eligible for the GBI-EM, which is tracked by USD 233 bn of investments globally.

The target is not far-fetched: “The USD 10 bn target is very realistic, especially when you look at the 2.5% weighting in the index,” investment banker Mustafa Fahim tells EnterpriseAM. The inflows will be almost “automatic” because passive funds have to buy to match the index, Fahim says. “We’ll likely see this happen in stages starting in early 2027, but the smart money often starts moving even before the official start date,” he adds.

Nizwa Bank’s Treasury and Global Markets head Muhammad Ihsan agrees. The headline number is achievable and “can be attracted within the first couple of years subject to normal market conditions,” he tells EnterpriseAM.

Why it matters

The inclusion is less about the USD figure and more about a structural shift in how global money relates to Saudi paper. “It basically means Saudi debt is no longer optional for global investors. It’s now part of the standard benchmark,” Fahim says. It brings in a much more diverse group of buyers, which helps lower the cost of borrowing for everyone.”

Passive money is all but certain, although active money is where the real prize lies. Index funds will buy because they have to, but the bigger, long-term story is convincing active managers to overweight Saudi paper. The first factor is that the returns have to be better than what they get in the US, “which looks likely as global interest rates start to drop,” Fahim says. The second is facilitating bond trading. “The recent upgrades in how we settle trades and the expansion of the Primary Dealers Program are key to making international desks feel comfortable,” he adds.

Plumbing has been upgraded: “The local currency market has addressed many issues that were an impediment towards attracting foreign investors,” Ihsan tells us. The inclusion follows a multi-year overhaul of the local market’s trading and settlement infrastructure, including the expansion of the Primary Dealers Program to include international banks, enhanced settlement mechanisms, the introduction of an over-the-counter settlement framework in mid-2025, as well as stronger connectivity with international central securities depositories.

BUT- Will regional noise scare investors off? “While headlines can be noisy, Saudi Arabia is viewed as a safe [wager] within the emerging markets,” Fahim tells us, adding that the index inclusion also provides a buffer against global risk-off episodes as the change is structural.

Ihsan strikes a more measured note: “In case of a global risk-off tone, inflows will get negatively affected, which is normal for any EM,” he says. Still, domestic investors have an interest in the SAR-denominated market, “and therefore regional or global risk-off events will not cause a big impact,” Ihsan adds.

Fahim argues the Kingdom enters the index from a stronger starting point than most emerging markets. “When countries like China or Indonesia joined these indexes, their borrowing costs went down as more global money flowed in. Saudi Arabia is actually in a better position because our credit rating is much higher than many other countries in the index,” Fahim says. The stable USD peg also takes away currency risks that often scare investors away from other emerging markets, he adds.

Ihsan sees a path to becoming a heavyweight in the EM local currency universe, but it could take a few years. “The Saudi market could easily become comparable to EM giants like Mexico or Malaysia, with foreign investors reaching well above one-third of the local market size,” he says.

The remaining gap: corporate issuance

“The biggest challenge is that most of the market is still government bonds,” Fahim says. Attracting long-term international players will need more debt issuances from private companies. “We need a wider variety of options beyond just government projects so that investors can spread their risk across different sectors of the economy,” he adds.

The index inclusion itself as part of the fix, Ihsan argues, as it “drives foreign demand while local currency markets attract interest,” helping market breadth and encouraging more issuers to tap the local currency market.