Saudi Arabia cashes in on record bond sale | Business| Economy and finance news from a German perspective | DW | 20.10.2016
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Saudi Arabia cashes in on record bond sale

The kingdom has sold billions worth of sovereign debt in its first global bond sale - the largest ever conducted by an emerging economy. The sale comes as Saudi Arabia's budget is squeezed by low oil prices.

The oil-rich country earned $17.5 billion (15.9 billion euros) from the sale of government bonds, with maturities of five, ten, and 30 years, British bank HSBC said Thursday.

HSBC was one of the banks underwriting the sale, which was Saudi Arabia's first in international finance markets. The sale was hailed as "historic" because it was nearly four times oversubscribed.

"It was the biggest syndicated issue ever by any country," said Jean-Marc Mercier, co-director of the debt capital markets division at HSBC.

The bond issue eclipsed the previous record for an emerging market - a $16.5 billion issue by Argentina in April. A source familiar with the Saudi offer said order books totaled $67 billion, coming close to the $69 billion record set by Argentina.

In the days running up to the sale, senior Saudi officials held a series of meetings with top investors in London and the United States to describe the kingdom's ambitious economic reform plans that include sharp cuts in state spending and a drive to develop non-oil businesses.

Boost to reforms

Saudi Arabia ran a record budget deficit of $98 billion last year, after a fall in oil revenues, which account for about 70 percent of the Saudi national government's income. This year the deficit is projected to come in at $87 billion.

Back-to-back deficits for the past three years have already caused Saudi Arabia's foreign currency reserves to decline to $562 billion in August from $732 billion at the end of 2014.

London-based Capital Economics said in a briefing paper that Saudi cash reserves were now "unlikely to fall much beyond their current level in the coming years," because the bond issue will finance around a third of next year's budget deficit, and almost all of the current account shortfall.

"This should dampen any lingering concerns that the riyal will be devalued. The government's debt-to-GDP [gross domestic product] ratio will rise as a result of the bond sale, but given its low starting point, it is hardly on a worrying path," Capital Economics said.

Amid the current budget squeeze, the government in Riyadh has also taken a series of austerity measures, including subsidy cuts and reductions in cabinet ministers' salaries. Moreover, it announced earlier this year an ambitious plan to diversify its economy.

At the heart of the plan, called Vision 2030, is an effort to privatize a stake of less than five percent in state oil company Saudi Aramco. Proceeds from the floatation are intended to help create what could become the world's biggest state investment fund, with around $2 trillion in assets.

Looking for yield

The success of the Saudi bond sale was mostly due to high investor demand as a result of ultra-low interest rates at a global scale. Investors looking for yield can now enjoy a coupon of 2.375 percent on the five-year Saudi bond, and 3.25 percent for the 10-year debt. The 30-year debt pays 4.5 percent.

Saudi Arabia had previously issued domestic bonds which, however, proved a drain on the liquidity of the country's banks. Saudi banks' loan-to-deposit ratio rose for the fifth consecutive month in August, reaching 90.8 percent, because of faster growth in credit relative to deposits, according to Riyadh-based Jadwa Investment.

According to analysts, the bond sale is also expected to pave the way for further Saudi debt issues in global markets in coming years, as well as bond sales by a string of big Saudi companies.

Mohieddine Kronfol, chief investment officer for Middle East fixed income at major asset manager Franklin Templeton Investments, said the debut issue would invigorate Saudi financial markets.

"Not only could the bond help develop the Kingdom's debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for Gulf Cooperation Council fixed income as well as more global investors to take a closer, and longer-term, look at the region," he told the news agency Reuters.

uhe/nz (Reuters, dpa, AFP)


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