Bond issuance to help Saudi Arabia cope with low oil prices: CE

Saudi Arabia’s upcoming international bond issuance, combined with ongoing fiscal consolidation, will help the kingdom adjust to low oil prices without abandoning the dollar peg, London-based Capital Economics (CE) said in a note on Tuesday.

“We expect the kingdom’s budget deficit to narrow to around 7.5 percent of GDP next year and, on this basis, the upcoming issuance will cover almost a third of the shortfall,” said Jason Tuvey, Middle East economist at CE.

The rest of the budget deficit will likely be funded by a combination of local currency bond sales and a drawdown of the government’s riyal savings at the central bank, he added.

By CE’s estimates, the bond sale will add 2 percentage points to the Saudi government’s debt-to-GDP ratio, which is likely to reach around 18 percent by the end of 2016, up from less than 2 percent in 2014.

While an international bond issue can help fund the fiscal deficit, the dollar revenues it brings will also help finance the kingdom’s current account deficit and cover nearly all its current account shortfall in 2017, the note said.

Moreover, the dollar bond issuance will significantly reduce the need for SAMA to drain its foreign exchange reserves in order to maintain the dollar peg, Tuvey said.  

The central bank has burnt through $180 billion of Saudi Arabia’s foreign exchange reserves since oil prices first started to fall in mid-2014, in order to plug the current account shortfall and offset capital outflows.

The upcoming bond sale– which could occur around October 7-9 according to media reports– has sparked a significant amount of investor interest, CE said, adding that it estimates that the kingdom will manage to sell its 10-year debt for a relatively low yield of 3.50 - 3.75 percent.

Saudi Arabia is also likely to follow the lead of other GCC sovereigns and offer bonds with a range of maturities. Earlier this year, Abu Dhabi and Oman sold five-year and 10-year bonds.

However, with global bond yields closing to historic lows, the kingdom may be tempted to issue longer-dated debt, like Qatar, which issued a 30-year note in May, the report noted.