Bond issues by Saudi Arabia’s government are expected to be worth tens of billions of dollars by the end of 2015 as the state ramps up debt sales to plug a hole in finances created by low prices for oil exports.
Central bank governor Fahad al-Mubarak announced last week that Riyadh had sold its first sovereign bonds since 2007, a SAR 15bn ($4bn) issue, after years paying down its debt to some of the world’s lowest levels.
Mubarak gave no details and, while he said more issues were on the way, did not elaborate. But bankers expect heavy issuance in coming months that could change banks’ balance sheets and eventually help to create an active domestic bond market.
“We expect the Saudi government to fund its 2015 deficit by raising SAR 200bn from the domestic bond market, besides drawing down its foreign currency reserves,” said Fahad Alturki, chief economist at Jadwa Investment, a major investment bank in Riyadh.
Low prices have saddled the world’s top oil exporter with a huge fiscal deficit. Mubarak said last week it would exceed an originally projected SAR 145bn this year; the International Monetary Fund thinks it will be about 20 per cent of gross domestic product, equivalent to roughly $150bn.
Until the recent issue, Riyadh was funding the deficit entirely by running down its financial reserves; Mubarak said it had withdrawn 244 billion riyals from reserves in 2015.
In theory, the government could continue relying completely on reserves for many more months. Net foreign assets at the central bank, which serves as the kingdom’s sovereign wealth fund, totalled $672bn in May.
But bankers and investors believe the recent issue signals the government’s intention to launch regular debt sales, which will find ready buyers among local institutions.
“The appetite is there from our side, as we are struggling to find long-term bonds with reasonable yields from a government entity. The market is ripe for them,” said a source at an institution which participated in the initial issue.
The first issue comprised 7- and 10-year conventional bonds sold at yields of 2.57 and 2.88 per cent, sources said. The bonds were privately placed with quasi-sovereign Saudi institutions, contrary to initial local media reports which suggested banks had bought them.
Bankers expect the government to issue riyal-denominated bonds according to a formal calendar, placing them with a wider investor base. Some think it may start issuing Islamic bonds as well as conventional ones, though officials have not said this.
“The market should expect larger government issuance tranches by the end of summer. Only government and semi- government funds were allowed to participate in the first bond, but when the quantum of issuance increases, banks and asset managers will be allowed to invest,” Alturki said.
State issues will quickly dwarf other debt sales; Saudi issuance of sukuk in all currencies totalled $7.8bn in 2014, while no conventional bonds were issued.
Significant amounts of the new bonds are unlikely to find their way into the hands of foreign investors; local institutions tend to hold bonds to maturity, and yields are too low to interest many foreigners.
But the new issues could help to extend the Saudi yield curve, which at present is largely illiquid above five years. This might encourage more corporate issuance.
In the long term, a big new government bond programme would probably tighten liquidity in the banking system, where money market rates are near record lows.
But that looks unlikely to happen to any great degree this year; commercial banks have invested nearly 300 billion riyals in central bank bills and non-statutory central bank deposits, and may simply switch some of this money into government bonds.
“There will be some tightening in September when corporates come back to the market looking for loans or refinancing, but I don’t think it will be by much,” said James Reeve, deputy chief economist at Saudi Arabia’s Samba Financial Group.
Many analysts expect the government to restrain its spending next year, which would reduce the need for new bond issues.