Posted October 27, 2016 Lily Mats
Last week Saudi Arabia launched its first ever international bond issuance scheme. This was conducted as a part of the Kingdom’s "Vision 2030" economic reform plan, targeted towards creating a much more diversified economy that is less dependent on oil revenue. The bond sale was a much anticipated event, raising more demand than expected; the total order book was $67 billion versus projected $10 billion-$15 billion. The kingdom has issued 5year, 10year and 30year bonds totalling $17 billion. Some analysts anticipated the over subscription and speculated that the country will opt to increase the size of the issuance to $20 billion, but this did not follow.
The two year slump in the oil market has weighed on country’s economy and bank sector, thus the turn to debt market is an effort to cover the fiscal gap. At present, oil represents three quarters of country’s revenue and over 90% of the Government’s revenue, while the kingdom was regarded by IMF as being at risk of running out of cash. The money raised from the capital markets was reported to have already been injected in the economy as the country has started repaying debts to contractors.
Saudi Arabia is in possession of around $600 billion in foreign-exchange reserves. A former official in Saudi Arabia's Ministry of Finance John Sfakianakis said "It's better for the money needed to cover the fiscal gap comes from other sources than reserve assets because as they get depleted that places a bigger risk over the medium to long-term."
The kingdom has followed the example of Argentina and Qatar, who earlier this year sold bonds amounting to $16.5 billion and $9 billion respectively. In an environment with over 10 trillion bonds with negative yields worldwide, investors have been desperate for yields. On the other hand, the prospect of a relatively flat Federal Reserve’s policy rate in the near future also contributed to the high demand for the EM bonds. Five and ten year bonds issued by Saudi Arabia yielding 2.37 and 3.25 per cent respectively, presented an attractive prospect for yield-starved buyers, particularly for insurance companies and pension funds.
Anecdotal evidence from Bloomberg informs that Saudi government officials were forthcoming about their vision for transforming the economy, however, they were reluctant to discuss the proxy war in Yemen, as it is unclear how much of the capital raised is going to fund the ongoing Saudi military campaign.