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Thu 20 Oct 2016 10:40 AM

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Saudi bond sale 'will plug third of 2017 deficit' – analysts

Record-breaking $17.5bn sale to push up debt-to-GDP ratio by 2.8 percentage points, says Capital Economics

Saudi bond sale 'will plug third of 2017 deficit' – analysts
(Image: REUTERS/Faisal Al Nasser)

Saudi Arabia’s record-breaking $17.5 billion sale of international bonds
will finance all of next year’s budget deficit and almost all of its current
account shortfall, according to an analysis by Capital

The kingdom marked its debut on the international bond market by selling a mammoth $17.5 billion of debt on Wednesday. It surpasses the current record held by Argentina for its $16.5 billion emerging market sovereign bond sale in April, and means Saudi Arabia’s foreign exchange reserves are unlikely to fall much beyond their current level in the coming years, said an analysis by Capital Economics.

Saudi Arabia’s budget deficit is expected to narrow to around 7.5 percent of GDP in 2017 – a third of which will be funded by the bond sale. The remainder is likely to be funded by a combination of local currency bond sales and drawdown of the government’s riyal savings at the central bank, analysis the said.

The sale should also dampen lingering concerns that the riyal will be devalued. And, although the government’s debt-to-GDP ratio will rise as a result of the sale, at 5.9 percent in 2015 it is not “on a worrying path”.

The report said the bond sale would likely push up the government’s debt-to-GDP ratio by 2.8 percentage points. Overall, government debt is likely to reach around 19 percent of GDP by the end of this year, up from less than 2 percent in 2014.

“This may raise concerns that debt is on an unsustainable path, but any such fears are overdone,” the report said. “After all, Saudi Arabia paid down debt during the oil boom so it was in a strong position to borrow when oil prices fell back.

“In any case, the government has made good progress on fiscal consolidation. And if we’re right in expecting oil prices to edge up over the coming years, then most of the spending cuts needed to rein in the deficit and stabilise the debt ratio have already happened.”

Saudi Arabia attracted massive investor demand of about $67 billion, local media said on Wednesday night. Arab News quoted a source close to the sale as saying the order books had come close to the $69 billion record set by Argentina.

The issuance was split into three tranches: $5.5 billion was sold at a five-year maturity, $5.5 billion at 10-years and $6.5 billion at 30 years. These sold for yields of 2.63 percent, 3.44 percent and 4.64 percent respectively – “broadly in line with our expectations”, Capital Economics said.

The government is reportedly planning further international bond issuance over the coming years. It is thought that huge demand for Saudi debt was due in part to low global interest rates and funds’ frustration with a lack of high-yielding assets around the world.

Mohieddine Kronfol,  chief investment officer of global sukuk and Mena [Middle East and North Africa] fixed income at Franklin Templeton Investments Middle East, said the bond issuance would “invigorate” financial markets.

“It is no surprise to see high demand from both local and international investors for Saudi Arabia’s debut sovereign bond issue, which should not only help finance the budget deficit but should invigorate financial markets and stimulate more issuance by local companies,” he said.

“Not only could the bond help to develop the kingdom’s debt markets by introducing a more sophisticated type of investor, but there are also positive ripple effects for GCC fixed income as well as more global investors to take a closer, and longer term, look at the region.”