Saudi Arabia will head to the debt market seeking $27bn as low oil prices begin to weigh on the country's finances.
The Kingdom is planning its first sovereign bond issue since 2007, and reportedly hopes to raise $5.3bn each month until the end of the year through tranches of five, seven and ten-year bonds. This is far larger than its last issue, of $4bn in July 2007, and appears to show cheap oil really is hurting the wealthy state.
Saudi Arabia’s budget deficit has risen this year, partly because of lower oil revenues. The country needs oil prices of around $105 per barrel in order to balance its deficit, but Brent crude is still priced around the $50 mark, after it was slashed from above $100 last June.
The Saudis have continually opted to keep their production levels high despite the falling price, in a move that seems aimed at deterring international investors from the US's burgeoning shale oil industry and defending market share. This is a departure from the past, when it would cut production to keep the price high. Senators in the US have been pushing for a retaliation against Middle East producers.
The news of a debt issue has “raised fresh concerns over the government’s seemingly relaxed response to the fall in oil prices,” says William Jackson of Capital Economics.
But the budget deficit is also higher because of costs associated with celebrating the new King Salman, who was ushered in eight months ago.
"Its budget deficit has risen this year, not only on the oil price decline, but also due to one-off fiscal outlays following King Salman’s accession to the throne in January. This included a two-month bonus payment that was mirrored by many state-owned entities and the private sector,” says Kaan Nazli of Neuberger Berman.
Nevertheless, from a fiscal perspective Saudi Arabia remains “exceptionally strong” and Nazil expects the bond issue will attract a great deal of interest from investors.
“Saudi Arabia’s public debt stood at 6.5 per cent of GDP at the end of 2014 and would stay under 10 per cent even if the $27bn bond plan was implemented,” he says. In future the country will also reap the benefits of recent investment in real estate and infrastructure, which make up another chunk of the budget deficit.
The move is also a sign of Saudi's desire to further develop its finance industry. At the moment, international investment in the country is limited by a number of laws which encourage local enterprise and state support of businesses and markets.
“We think the decision to issue debt has more to do with deepening Saudi Arabia’s domestic financial market,” says William Jackson of Capital Economics.